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Capital commitment period: definition & important aspects for buyers
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Capital commitment period in a nutshell:
The capital commitment period describes the period between payment for goods or services and their conversion into cash through sale. For purchasing, this key figure is essential for optimizing working capital and avoiding excessive inventories.
Example: An automotive supplier reduces its capital commitment period from 45 to 30 days by extending the payment terms with suppliers from 30 to 45 days and at the same time reducing the average storage period for its raw materials from 15 to 10 days.
Contents
Introduction to purchasing controlling: capital commitment period
What is the capital commitment period?
The capital commitment period is the period of time during which a company's financial resources are tied up in the value creation process. It extends from the purchase of raw materials or goods through production to sales and receipt of payment from the customer. A longer capital commitment period means that funds are not available for longer, which affects liquidity and restricts financial flexibility.
Core elements of the capital commitment period
Significance of the capital commitment period in purchasing
In purchasing, the capital commitment period is a decisive factor for the financial health of a company. By managing this period efficiently, companies can improve their liquidity and reduce financing costs. Buyers contribute to this by determining optimal order quantities, negotiating delivery conditions and minimizing stock levels. A short capital commitment period makes it possible to react more quickly to market changes and secure competitive advantages.
Whitepaper: Optimizing the capital commitment period for efficient working capital management
Application of the capital commitment period
The capital commitment period helps companies to understand the period of time in which capital is tied up in the value creation process. By analyzing this, financial resources can be used more efficiently and liquidity bottlenecks can be avoided.
Calculation example
Given:
- Average storage time: 25 days
- Production time: 15 days
- Days sales outstanding (payment term to customers): 30 days
- Payables term (payment term from suppliers): 20 days
Calculation of the capital commitment period:
Capital commitment period = inventory period + production period + receivables period - payables period
Capital commitment period = 25 days + 15 days + 30 days - 20 days
Capital commitment period = 50 days
Interpretation:
The company has its capital tied up for an average of 50 days before it receives liquid funds again through incoming payments.
Practical application for buyers
Example: A buyer negotiates longer payment terms with suppliers.
If the payment term is extended from 20 to 35 days:
New capital commitment period = 25 + 15 + 30 - 35 = 35 days
Result:
The extended payment term reduces the capital commitment period by 15 days. As a result, the company has access to liquid funds earlier and improves its financial position.
Evaluation and strategic findings
✓ Critical success factors
→ Supplier management: strategic negotiation of longer payment terms while maintaining stable supplier relationships
→ Process optimization: efficient warehousing and inventory management to reduce throughput times
→ Data-based management: continuous monitoring of capital commitment figures for rapid adjustments
⚠ Challenges and limitations
→ Conflict of interest: balance between optimal capital commitment and security of supply
→ Market dependency: limited negotiating power with strategic suppliers
→ Seasonality: fluctuating capital commitment due to seasonal business cycles
Future trends and implications:
"Digital transformation enables new approaches to optimizing capital commitment"
→ Supply chain finance: innovative financing solutions for more flexible payment terms
→ Predictive analytics: AI-supported prediction of capital commitment requirements
→ Automated inventory optimization: dynamic adjustment of stock levels
→ Blockchain-based payment processes: Accelerating financial flows
Conclusion on the capital commitment period
The capital commitment period is a key indicator of a company's financial efficiency. By actively managing procurement, storage, production and payment processes, companies can optimize their liquidity and secure competitive advantages. Modern technologies and innovative financing solutions offer new opportunities to reduce the amount of capital tied up. The key to success lies in striking a balance between minimal capital commitment and operational stability.
