How to Optimise Working Capital?
Optimise Working Capital: What is Working Capital?
To order to understand how to optimise working capital, we need to understand what is working capital.
Working capital is calculated as current assets less current liabilities. This amount is available to fund your day-to-day business activities.
Work Capital = Current Assets – Current Liabilities
Current Assets – consist of cash and any other liquid assets (e.g. accounts receivable, inventory, prepaid expenses)
Current Liabilities – consist of any short term finance repaymentd, expenses (e.g. salary, rental), tax and accounts payable. In simple terms, any payments that are due within one year.
Why Optimise Working Capital?
By optimising working capital, businesses can get access to more cash that can give a boost to the company’s revenue.
Below are a few of the most basic reasons why SMEs should monitor and optimise working capital carefully.
Below extracted from Capgemini Blog – Working Capital Optimization – What’s it All About?
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Common Issues and How to Optimise Working Capital
EY, Asia Consumer Products Forum, March 2014
Measurement |
Description |
How to optimise working capital? |
| Long Days of Sales Outstanding (DSO) | DSO is simply how long it takes for business to get paid.If business has large DSO, this means their working capital is tied up in their accounts receivable where it could be utilised in other parts of the business | Reduce DSO, (turns sales into cash as quick as possible), some of our tips:
Read more here. |
| Long Inventory Outstanding (DIO) | DIO is the duration for inventory to turn into sales / cash flow If business has large DIO, this means their working capital is tied up in their inventory where it could be utilise in other parts of the business |
Reduce DIO, (turns inventory into cash as quick as possible) some of our tips:
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| Short Payables Outstanding (DPO) | DPO is number of days that business takes to pay their invoices to trade creditors (cash outflow). If business has a small DPO, this means that cash is leaving the company sooner. |
Extend DPO (prolong cash within the business)This point is usually a bit more difficult for SMEs to negotiate due to their limited bargaining power. Nevertheless, SMEs can try to:
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By optimising accounts receivable and accounts payable and cash management, additional working capital can be utilised to generate further revenue for businesses.
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