Relevance of Working Capital Management

To achieve adequate liquidity, the introduction of a viable working capital management is of central importance. This is especially important for small companies with limited capital reserves for targeted liquidity management.

Working Capital Management includes four key components:

Accounts Receivable Management

Aims to shorten the payment terms of accounts receivable. It is important to achieve as short as possible payment terms from customers. This can be achieved by a clear contract arrangement and timely invoice preparation, as well as a well-structured dunning process. Accounts Receivable Management must also include customer strategy, since granting payment terms influences customer behavior.

Inventory Management

Inventory management is primarily aimed at companies that produce and build up inventory levels. It is necessary to maintain as small a stock as possible so that too much capital is not tied up. It is particularly important to define an inventory strategy and implement a balanced production management. Especially, the distinction between the pull and push principle is of crucial importance.

Accounts Payable Management

Finally, accounts payable management should be mentioned. It is of great importance to utilize payment terms as extensively as possible and avoid advance payments. This can be justified by the fact that creditors can be seen as inexpensive or free credits. In creditors management, the supplier strategy must be included, as timely settlement of payment obligations significantly influences the relationship with the supplier.

Risk Management

Lastly, as a tool of Working Capital Management, risk management is to be mentioned. This refers to the diversification of risks from receivables, such as factoring. However, these tools are more relevant for larger companies as they complicate the process and make it more cumbersome.

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