What factors determine working capital

Key figure â € œWorking Capitalâ €: Opportunities for optimization in accounting practice

Industry comparisons and control instruments


Financing the expansion of business activities by capital providers (shareholders, banks) has been reaching its limits for several years. Even newer forms of financing (e.g. silent participation, profit participation rights) can only compensate for this to a limited extent.

The working capital (including maturities of the accounts receivable and accounts payable) acts as a "credit rating lever": A high level of working capital is associated with a high capital requirement and vice versa. A study by the management consultancy Dr. Wieselhuber & Partner (from 2004) provides answers to the following questions, among other things: How long are companies tied to working capital? How can it be controlled or optimized?



Very few controlling / accounting systems today are consistently geared towards mapping the working capital consequences. For example, it is often not known what consequences a product launch has for working capital over the entire product life cycle. For many products, for example, working capital costs rise sharply in the phase of a decline in sales (e.g. due to lower inventory turnover).



What is meant by “working capital”? What is the significance of it?

Working capital - also known as net current assets -, an absolute key figure for assessing liquidity, includes the long-term financed part of current assets:


Current assets (if liquidable within one year)

./. short term liabilities.

= Working capital


Determination of working capital

Inventories (raw materials, consumables, supplies, finished goods)

+ Trade accounts receivable

./. liabilities from goods and services

./. Payments received

+ Advance payments made

= Working capital


The net current assets do not change in the case of business transactions that only affect the short-term balance sheet items (e.g. payment of short-term liabilities in cash or by bill of exchange) or only the long-term balance sheet items (e.g. allocation of reserves). It is influenced by decisions that are long-term and affect short-term balance sheet items (e.g. cash sale of a property, repayment of long-term debts from cash). Working capital should always be positive, since negative working capital indicates failure to comply with the golden rule of balance (lack of coverage of fixed assets and long-term current assets by equity and long-term borrowed capital).

Working capital particularly reveals the extent to which parts of the short-term disposable current assets are financed in the long or medium term. This maneuvering fund could be used to finance long-term capital needs.

The working capital shoulders neglects in the competitiveness of the primary performance factors (products, brands, services) via collection times and inventory. It is not uncommon for working capital to rise significantly before a crisis situation.



What is the retention period in working capital in an international comparison?

With an increasing retention period in the working capital, the capital requirement for the expansion financing of a company increases considerably. With regard to the average retention period in net current assets, there are considerable differences in an international comparison; the commitment period is - compared to the industry

  • at German Companies (with average equity ratio: 33%): 80 days; almost 16% of the companies examined have a longer term of engagement than 146 days,

    Consumer goods industry with a high turnover rateof the end products and thus low inventory levels (e.g. food companies): 45 days,
    Consumer goods industry with low turnoverof the end products and thus larger inventories (e.g. furniture, porcelain companies): 83 days,
    Capital goods industry with no / less plant-intensive end products (e.g. pharmaceutical / chemical industry, automotive supplier industry): 81 days,
    Capital goods industry with asset-intensive end products (e.g. mechanical engineering, construction industry): 116 days,

  • at French Company (average equity ratio: 35%): 61 days,
  • at British Company (average equity ratio: 50%): 44 days; in Great Britain, for example, the market volume for domestic factoring is twice as large as in Germany.

For efforts to optimize the net working capital (reduction of the retention period), an industry comparison of the retention period for individual components of the working capital is particularly informative in practice; the table below provides important guidelines for self-diagnosis.



Components of working capital: range in days (mean values)


Consumer goods industry

Capital goods industry



High "speed" of the end products

Low "speed" of the end products


Not / less system-intensive

Claims-wide (outstanding customer payments)






Inventory range (warehouse)






Liabilities range (open vendor items)






Working capital reach








The longer the period in which the supplier's liability is not paid, the longer the company has an interest-free loan available (decisive disadvantage: after 3 to 10 days, the discount is lost).



Formulas for calculating the ranges:


average receivables L + L

Range of receivables =  -----------------------------------------------

Turnover per day



Material consumption

Inventory turnover =  ----------------------------------------

average stock



Inventory range =  ------------------------------------

(in days) stock turnover


average liabilities from L + L

Liability reach =  --------------------------------------------

Material consumption per day




The following overview shows, among other things, a relatively high capital commitment of medium-sized companies in terms of inventories (inventory range). When it comes to the range of inventory, larger companies do better in that they generally sell larger volumes than small companies.



Relationship between company size and working capital: range in days (mean values)


Sales size class


<€ 100 million

€ 100 - 500 million

> € 500 million


Claims-wide (outstanding customer payments)





Inventory range (warehouse)





Liabilities range (open vendor items)





Working capital reach






How can working capital be controlled specifically?

Optimizing the net working capital increases the internal financing leeway in the long term; this creates equity for necessary investments and divestments. Immediate consequences for the individual components of working capital (e.g. period of receivables, stock levels) have, among other things, the complexity of the product range, changes in the range, specific power relationships in the markets, structural measures in accounting (e.g. factoring of receivables), the depth of added value, internationalization steps (e.g. financing of stock levels in the destination country) etc.


Example of expanding the range:

Due to an increase in the complexity of the range, stocks often rise disproportionately, especially when new product variants "cannibalize" part of the previous range in stagnating markets.

Rule of thumb: The growth in sales should always be greater than the increase in complexity. In the case of low growth, an increase in complexity is only justifiable if new products generate higher margins than the previous product range.

According to Wieselhuber & Partner, the complexity of the range is the most important driving factor for working capital.







Optimization of the working capital inventory for individual process components

Inventory reduction programs, strict receivables management and increased demands on suppliers lead to an improvement in the "Working capital reach" indicator:

  • To improve accounts receivable management, faster and more frequent invoicing and more consistent dunning are particularly important. The outsourcing of requirements is often not only useful in terms of the balance sheet, but also from an economic point of view; because the costs of receivables management are considerable. The accounts receivable management defines earnings risks (creditworthiness of the customers) and the conditions as decisive parameters of the capital commitment.



Rule of thumb in receivables management:

Regardless of whether a company sells accounts receivable or not, 90% of accounts receivable should be factoring. Higher customer risks must be reflected in the corresponding pricing, payment conditions, etc.



  • in the Accounts Payable Area Consideration should be given to extending the scope of the liability and thus creating additional financial leeway; In doing so, however, the discount options should not be disregarded - because "Supplier credit is expensive" (see. Oak wood, BiBu 5/1994, p. 109 ff., And BiBu 6/1994, p. 127 ff.). In particular, the payment agreements with main suppliers should be checked.
  • The Inventory management In the case of raw materials, consumables and supplies as well as finished goods warehouses, efficiency potentials in terms of the supply chain must be checked regularly: In particular, the formation of component / component / value-added groups can make a significant contribution to reducing net working capital. In addition, the introduction of minimum order quantities reduces the amount of capital tied up.

Planned and effective inventory sizes for accounts receivable, inventory and supplier liabilities must be checked continuously.



Industry-specific information on optimizing working capital

Unless in the Consumer goods industrywith a high turnover rate of the end products and thus low inventory levels (e.g. food companies) the inventory range of the inventory of raw materials, consumables and supplies (RHB) as well as finished goods is more than 60 days, the following working capital initiatives in particular should be taken:

  • Range adjustment and
  • Reorganization of the added value with the suppliers.

At companies of the Consumer goods industrywith a low turnover rate of the end products and thus high inventory levels (e.g. porcelain figurines), the following measures are recommended to optimize working capital:

  • Limitation of the range complexity in order to avoid a rapidly growing capital tie-up for raw materials, consumables and supplies as well as finished goods (as a rule, the RHB / finished goods tie-up increases more than the number of products).
  • Consideration of the costs of the inventory as part of the new conception of products (burden on the slow-movers),
  • increased observation of customer risks, especially if the customer structure is considerably “atomized”; The default risks are considerable, especially in low-capital retailing, and the costs of risk management are high (credit insurance, etc.),
  • Consistent use of outsourcing potential in production to reduce capital requirements at this point.

In the asset-intensive capital goods industry, prepayments received, in particular, can lower working capital.


Working capital represents a variable that runs across the operational functions (in particular purchasing, production, sales, accounting); In this respect, corresponding controlling systems must start with the cost type / point accounting.

Controlling systems that control individual functional areas with the help of direct key figures (to comply with financial goals) are still significantly underdeveloped, e.g .:

  • Range of receivables according to customer groups or article groups (controlling accounting and sales),
  • Binding range according to supplier groups (control of accounting and purchasing).



What effects do changes in working capital have on balance sheet and income statement structures?

Every improvement in working capital, i.e. shortening the retention period for customer accounts receivable, stocks or lengthening the retention period for supplier liabilities, releases liquid funds. For companies that have been able to reduce the retention period of their net working capital from 143 days to 80 days, this has the following consequences, for example:

  • Reduction of working capital by approx. 56%,
  • Increase in the equity ratio by approx. 9%,
  • Reduction of the balance sheet total by approx. 5% (reduction of borrowed capital),
  • Reduction of the interest expense by approx. 40% (profit and loss effect).

Companies with negative annual surpluses, especially if they occur over several periods, do not necessarily have to have poor working capital ratios.



Rule of thumb: The lower the equity ratio, the better a company's working capital position should be.



The key figure "Working capital to balance sheet total" (see table) provides information about expected liquidity problems, among other things: Experience has shown that this metric deteriorates considerably as early as three years before a liquidity crisis.



Working capital in relation to total assets

Sales size class

Working capital / total assets

<€ 100 million

14 %

€ 100 - 500 million

13,3 %

> € 500 million

11,6 %





Information on the empirical investigation of the Dr. Wieselhuber & Partner GmbH

sample: Investigation of 1,059 companies from 16 different industrial sectors in Germany (including selection according to consumer goods and capital goods industries).

Corporate structure: Almost all large companies were recorded, but the sample also included a large number of smaller companies with an annual turnover of <€ 50 million. The study is representative from an annual turnover of> € 50 million.

Evaluation object / period: Annual financial statements for the years 2001/2002/2003 were taken from the Hoppenstedt balance sheet database, which are broken down according to the accounting regulations of the German Commercial Code (total / cost of sales method), IAS / IFRS and US-GAAP.

Study title: "Working Capital Management in Germany"



Dr. Wieselhuber & Partner GmbH
Stephanie Meske, Public relations
Business consulting
Nymphenburgerstrasse 21
80335 Munich

Tel .: 089 / 28623-139
Fax: 089 / 28623-153
Internet: www.wieselhuber.de



BC 1/2005