In the wake of the financial crisis, the ability of companies to obtain financing has become a heated issue. Much is being written about how difficult it is for companies to borrow money and about various ways of handling this. It is unfortunate that the discussion is not focusing on an obvious financing opportunity that every company has, namely, its own balance sheet. By focusing on the working capital that is tied up in purchasing, inventory, production and sales, most companies can free up to 20%-30% of their working capital in 6-12 months. Doing this doesn’t require a lot of magic, but a structured approach involving the streamlining of working capital processes in order to free up capital in a company's own organization.
Perhaps the fact that there is no magic involved is a problem? Many company leaders routinely say that they are constantly working with capital efficiency and that not much more can be done. Despite this, our experience from working with some of the largest multinational companies as well as medium-sized local companies shows that oftentimes, surprisingly large amounts can be freed up. One common reason is the gap that exists between the strategic perspective (of management) and the daily operative world in which much of the capital is tied up. Further, it is a myth that the only way to improve capital efficiency is to offer poorer terms of payment to customers and suppliers. Sure, this is an important part, but better opportunities can often be found in optimizing lead times, inventory, logistics solutions, administrative inefficiency, and so on.
Here's a case in point, involving a large manufacturing company with SEK 12 bn in sales and total assets of SEK 10 bn, which has SEK 4 bn in loans and has SEK 4 bn tied up in working capital. By reducing the 4 billion to 3 billion (25%), we can considerably lighten the financing situation while at the same time improving the company's key ratios. Moreover, the cost is relatively low, since the actions often concern time that must be spent on process improvements or renegotiations with customers and suppliers.
In a normal market, many might feel that this is too labor-intensive and time-demanding, and would rather focus on other activities, such as sales, new products, etc. But in today's situation, failing to use this source of capital is irresponsible. If you look at the largest companies in the Nordic region today, they are borrowing substantial amounts at the same time that they have large amounts tied up in working capital. The financing that exists on their own balance sheets is thus a significant resource and something that they would be wise to capitalize on.
Perhaps the fact that there is no magic involved is a problem? Many company leaders routinely say that they are constantly working with capital efficiency and that not much more can be done. Despite this, our experience from working with some of the largest multinational companies as well as medium-sized local companies shows that oftentimes, surprisingly large amounts can be freed up. One common reason is the gap that exists between the strategic perspective (of management) and the daily operative world in which much of the capital is tied up. Further, it is a myth that the only way to improve capital efficiency is to offer poorer terms of payment to customers and suppliers. Sure, this is an important part, but better opportunities can often be found in optimizing lead times, inventory, logistics solutions, administrative inefficiency, and so on.
Here's a case in point, involving a large manufacturing company with SEK 12 bn in sales and total assets of SEK 10 bn, which has SEK 4 bn in loans and has SEK 4 bn tied up in working capital. By reducing the 4 billion to 3 billion (25%), we can considerably lighten the financing situation while at the same time improving the company's key ratios. Moreover, the cost is relatively low, since the actions often concern time that must be spent on process improvements or renegotiations with customers and suppliers.
In a normal market, many might feel that this is too labor-intensive and time-demanding, and would rather focus on other activities, such as sales, new products, etc. But in today's situation, failing to use this source of capital is irresponsible. If you look at the largest companies in the Nordic region today, they are borrowing substantial amounts at the same time that they have large amounts tied up in working capital. The financing that exists on their own balance sheets is thus a significant resource and something that they would be wise to capitalize on.