How is your working capital performance compared to your competitors?

Working capital performance is a strong indicator of a healthy and well-run company but might differ between markets and industries. An indication of relative performance compared to competitors provides a better understanding of your position on the market and possible improvement areas. The question then is, what measurements are used to determine working capital performance?

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Do you want to know more about Working Capital Management or do you want a benchmark analysis for your company?

Why is working capital important?

Every company needs to employ capital bound to the operations. However, the amount required is closely connected to the efficiency of the internal processes and can be optimized to ensure full utilization of a company’s assets. Cash released from working capital is directly linked to company value – 100% of the released cash becomes available for other purposes.

Working capital build-up

Working capital can be found in both a company’s assets and liabilities, this benchmark focuses on capital tied up in the following areas (with relevant KPIs):

  • Accounts receivable (customer invoices): Measured as the average credit days given to customers.
  • Inventory (Raw material, Work in progress, and Finished goods): Measured as the average number of days products are in stock.
  • Accounts payable (supplier invoices): Measured as the average credit day the company has to pay its suppliers.

Purpose of a benchmark

Benchmarking is used to give an overview of the working capital situation and where the capital is tied up, as well as your performance against your peers.

  • The first part of a benchmark contains a breakdown of the company’s net working capital to highlight where the capital is tied up.
  • The following part presents KPIs for the benchmarked company and relevant peers. By comparing the KPI performance to peers, potential improvement areas can be identified.

Breakdown of net operating working capital and KPIs

By breaking down the separate working capital components (Inventory, Accounts Receivable, Accounts Payable, and NOWC), we can see the drivers of the working capital performance. The different drivers consist of underlying financial performance and are measured against Sales, Cost of Goods Sold (COGS), and Spend. 

DSO: Days sales outstanding - How many days it takes on average for customers to pay from the day an invoice is sent

DIS: Days in stock - How many days it would take to sell the current inventories

DPO: Days payables outstanding - How many days it takes on average to pay the supplier from the day an invoice is sent

Working capital KPIs performance compared to peers

Understanding working capital performance compared to peers creates the foundation for further improvements. Once you realize the need for improvements, it requires deciding on an appropriate approach, management commitment, and expertise to achieve results. Working capital affects top-level results but starts at the individual performance of each individual. 

How we at Capacent work with Working Capital Management

Together with our customers we design and implement world-class working capital management. We combine our unique subject matter expertise with a practical change management approach.

The Capacent working capital methodology – from business case to measured results – is proven through more than 300 working capital improvement projects over different  companies, industries, and countries. With our structured, fact-based, and hands-on approach we work with our customers from the board of directors to the factory workers to achieve a cash culture.

We work with working capital impacting processes such as:

  • Order to cash – e.g reducing invoicing delays, improving collection routines
  • Procure to pay – e.g. optimizing payment practices, improving negotiations for supplier terms and invoicing logics
  • Order to delivery – e.g. improving inventory replenishment parameters, developing sales and operations planning
  • Reporting and KPIs – e.g. working capital dashboard with leading indicators

If you want to know more, contact some of our WCM experts, Erik Påhlson (erik.pahlson@capacent.se) or Magnus Östlund (magnus.ostlund@capacent.se) or fill out the form above and we will contact you.