The capital you use to fulfil your day-to-day financial obligations and keep your operating cycle running, is your working capital. The less funds you need, the better for your liquidity and return. A good and balanced management of your working capital contributes to the health of your company.

Purchase, production, stock, sale and receipt of payment of your invoices. You need working capital for each link in this cycle. It is important that your capital is not stuck unnecessarily in this operating cycle. After all, you cannot invest this money, on the contrary, it costs you money.

How long cash is trapped in your operating cycle is determined by the so-called “cash conversion cycle”. The shorter, the better. In order to achieve an optimal time span, your business process must be a well-oiled machine. Is there a problem somewhere? Then your need for working capital increases, as well as for external financing. That weighs on your liquidity and your return. The management of your working capital is therefore not only a matter for your financial department, but also for your purchasing, production and sales departments.

Gross working capital is your current assets (cash, inventory and trade receivables).

When you deduct trade payables and other short-term payables, you get your net working capital.

You can calculate your working capital by subtracting current liabilities from current assets. Current assets include cash, inventories and trade receivables. Current liabilities include supplier debts and other short-term debts.

Supplier credit, stock management and customer credit determine your working capital needs. Your supplier credit is an important source of working capital. It is money that you have not yet paid to your suppliers but can already use in your production process. Your stock and your accounts receivables are important consumers of working capital.

Each of these three factors are instruments you can influence to optimize your working capital position.

1. Effective supplier management

The longer it takes to pay your suppliers, the more money remains in your company and the lower your working capital requirement. However, make sure that such a postponement of payment does not have a negative impact on the relationship with your supplier. Or that you do not pay an exponentially higher price for your postponement. If you pay your invoices too late, your creditworthiness will suffer. Therefore, make good arrangements.

2. Efficient stock management

The sooner you can turn your stock into sales, the healthier your company's liquidity position will be. Follow the market closely and coordinate with your suppliers. Too much stock will unnecessarily increase your maintenance costs, storage costs, etc. There is also a greater chance obsolete stock is not sold. If your stock is too low, you may not be able to serve your customers or to do so on time. Therefore, maintain a balance.

3. Smart customer management and credit management

The quicker your customers pay, the quicker you can use the money to invest, pay for new orders, and so on. Again, always keep the commercial relationship with your customer in mind. Manage the risks of late or non-payment of your customers in a smart way. Set up an efficient credit management system complemented by trade credit insurance. Therefore, optimise your receipts.

In short, the optimal management of your working capital is of strategic importance to your company.