My working capital is too high – what should I do?
Excessive working capital ties up liquidity, increases financing requirements and raises operational risks. Active management is therefore a key success factor, particularly for SMEs with limited financing options. In this article, you will learn:
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Working capital is calculated as follows:
Inventories + receivables – liabilities
It describes the capital tied up in operational business that is necessary to maintain the business model.
There is often talk of core working capital. This can be supplemented by other receivables and liabilities. However, these items can usually only be influenced to a limited extent, as they are often subject to legal requirements and late payments can result in penalties or interest.
In manufacturing companies, inventories are divided into three categories:
High inventory levels not only lead to tied-up capital and higher financing costs, but also to:
2.1 Targeted management of raw materials, consumables and supplies
Proven optimisation measures include:
For sustainable results, a structured analysis is recommended:
ABC analysis
XYZ analysis
Combined ABC/XYZ matrix (practical approach)
Important: Any optimisation must take supply chain security into account in order to avoid production interruptions.
2.2 Semi-finished and finished products
o Reduced capacity utilisation worsens the cost structure
o High inventories increase obsolescence and price risks
Close coordination between sales, production and planning is crucial here.
Possible measures could include, for example:
The amount of accounts receivable is largely determined by payment terms. These reflect market practices and negotiating power.
Long payment terms tie up capital and increase the risk of default.
Recommended measures:
Liabilities are the mirror image of receivables. Basic rule:
Payment terms for suppliers should be at least as long as those for customers.
The most important key figure is the cash conversion cycle (CCC). It shows how long capital is tied up in the operating process.
Components of the CCC
Overview of KPI
KPI | Formula |
DSO | (Receivables / Turnover) × Days |
DIO | (Stock / Turnover) × Days |
DPO | (Liabilities / Purchases) × Days |
CCC | DSO + DIO – DPO |
Effective management requires:
Benchmarking with competitors or peer groups increases transparency. AI-supported analyses for inventories are particularly efficient in complex manufacturing processes and replace time-consuming manual evaluations.
Working capital is one of the biggest drivers of financing requirements, alongside fixed assets. Targeted optimisation:
The following factors are crucial for success:
After a successful optimization round, the focus shifts from further cost savings to fine-tuning and consistent management.
CoFit Consulting GmbH supports you from analysis to implementation – in a practical, data-driven and implementation-oriented manner.
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1. What is working capital?
Working capital is calculated as follows:
Inventories + receivables – liabilities
It describes the capital tied up in operational business that is necessary to maintain the business model.
There is often talk of core working capital. This can be supplemented by other receivables and liabilities. However, these items can usually only be influenced to a limited extent, as they are often subject to legal requirements and late payments can result in penalties or interest.
2. Optimise inventories – the biggest lever
In manufacturing companies, inventories are divided into three categories:
High inventory levels not only lead to tied-up capital and higher financing costs, but also to:
2.1 Targeted management of raw materials, consumables and supplies
Proven optimisation measures include:
For sustainable results, a structured analysis is recommended:
ABC analysis
XYZ analysis
Combined ABC/XYZ matrix (practical approach)
⚠️ Important: Any optimisation must take supply chain security into account in order to avoid production interruptions.
2.2 Semi-finished and finished products
Close coordination between sales, production and planning is crucial here.
Possible measures could include, for example:
Dropshipping in retail (direct shipping from supplier to customer)
3. Optimise receivables – secure liquidity
The amount of accounts receivable is largely determined by payment terms. These reflect market practices and negotiating power.
Long payment terms tie up capital and increase the risk of default.
Recommended measures:
Factoring as an alternative, especially for customers with strong credit ratings
4. Strategically managing liabilities
Liabilities are the mirror image of receivables. Basic rule:
Payment terms for suppliers should be at least as long as those for customers.
Nevertheless, payment dates should be consciously managed with regard to balance sheet dates and key figures.
5. Key performance indicators for management purposes
The most important key figure is the cash conversion cycle (CCC). It shows how long capital is tied up in the operating process.
Components of the CCC
Overview of KPI
KPI | Formula |
DSO | (Receivables / Turnover) × Days |
DIO | (Stock / Turnover) × Days |
DPO | (Liabilities / Purchases) × Days |
CCC | DSO + DIO – DPO |
6. Manage working capital sustainably
Effective management requires:
Benchmarking with competitors or peer groups increases transparency. AI-supported analyses for inventories are particularly efficient in complex manufacturing processes and replace time-consuming manual evaluations.
7. Conclusion
Alongside fixed assets, working capital is one of the biggest drivers of financing requirements. Targeted optimisation:
The following factors are crucial for success:
After a successful optimization round, the focus shifts from further cost savings to fine-tuning and consistent management.
