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Labor capital management: definition & important aspects for procurement specialists
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Working capital management in a nutshell:
Working capital management refers to the active management of a company's current assets and liabilities in order to optimize liquidity. For purchasing, this means the strategic structuring of payment terms and inventories in order to minimize capital commitment and improve liquidity.
Example: An automotive supplier reduces its working capital by EUR 2.5 million within 6 months by extending payment terms from 30 to 60 days while at the same time optimizing inventory levels by 20%, thereby improving its cash conversion cycle by 25 days.
Contents
What is working capital management?
Working capital management refers to the efficient management of a company's net current assets, i.e. the difference between current assets and current liabilities. The aim is to secure liquidity, optimize operational processes and minimize tied-up capital. Effective working capital management makes it possible to free up financial resources and strengthen the company's financial stability.
Core elements of working capital management
Significance for purchasing
In purchasing, working capital management makes a significant contribution to the financial health of the company. Skillful negotiation techniques for payment terms and delivery times allow buyers to positively influence liquidity. In addition, optimal order planning makes it possible to reduce inventories and thus lower capital costs. Strategic working capital management in purchasing therefore leads to improved cash flows and increases financial flexibility.
Working capital management: from traditional liquidity management to integrated working capital management
Working capital management has evolved from a fragmented management of individual financial areas to an integral part of the corporate strategy. Originally, receivables, payables and inventories were managed independently of each other, which often led to inefficient capital commitment and limited liquidity. In the face of increasing competition and global markets, efficient working capital management is now crucial to ensure financial flexibility and increase profitability. The transformation to an integrated approach is therefore essential.
Old: Traditional liquidity management
Traditional approach: In traditional practice, companies focused on the separate management of receivables, payables and inventories. Liquidity monitoring was mostly done manually using spreadsheets, without real-time data or integrated systems. Inventory levels were often kept high to avoid supply shortages, but this led to increased capital commitment and inventory costs. Payment terms were not used strategically, leaving discounts and payment terms unused. This isolated approach made it difficult to manage working capital effectively and impaired financial agility.
New: Working Capital Management
Working capital management: The modern approach integrates all elements of current assets and uses advanced technologies for holistic management. Through the use of ERP systems and specialized financial tools, real-time data is available that enables precise monitoring of receivables, payables and inventories. Methods such as just-in-time, supply chain financing and dynamic discounting optimize capital commitment. In addition, the ABC analysis of key figures such as the cash conversion cycle enables continuous improvement. Cross-departmental collaboration promotes efficient processes and supports strategic decisions to maximize liquidity and profitability.
Practical example: Automotive supplier
An international automotive supplier introduced integrated working capital management to improve its financial performance. By implementing an ERP system, inventories were reduced by 25% by combining just-in-time deliveries with supplier management were agreed. Supply Chain Financing enabled the company to extend payment terms without straining relationships with suppliers. The cash conversion cycle was shortened by 15 days, freeing up 10 million euros in liquidity. These funds were reinvested in research and development, resulting in innovative products and an increased competitive advantage.
Conclusion on working capital management
Working capital management is an indispensable tool for modern purchasing. Companies can significantly improve their liquidity and reduce costs through the targeted management of receivables, payables and inventories. Success depends on striking the right balance between extended payment terms, optimized inventories and stable supplier relationships. With increasing digitalization and AI-supported solutions, working capital management is becoming even more efficient and dynamic, giving companies a decisive competitive advantage.
