A proven lever for internal financing of companies is the so-called working capital. What is this actually, and what should you pay attention to if you want to optimize working capital?
“Working capital? is the technical term for the assets required for operations. This in turn is the difference between current assets and current liabilities. Current assets consist of inventories, cash receivables and prepaid expenses. Be sure to include tax liabilities in current liabilities.
When working capital is positive, current liabilities are covered by current assets. Current operations are safely financed. If it is negative, there is a risk of insolvency. A positive working capital is therefore highly advisable.
But how high should working capital ideally be? In many companies, working capital shows untapped liquidity reserves.
If you tie up more capital in your processes than necessary, you block additional business opportunities. As working capital increases, return on equity goes down, a metric that provides an indication of the quality of your business.
So it makes sense to constantly monitor your working capital for potential reductions. The key levers for gaining liquidity are inventories and accounts receivable.
In addition to working capital optimization, you can usually also free up cash through inventory optimization.