Haggling about the payment date

To have as much liquidity as possible, companies collect receivables earlier and pay bills later. But most of their capital is tied up in warehouses – excessively high inventories considerably burden finances.

Suppliers of Leifheit, the household goods manufacturer, now have to wait longer for their money. The company often pays its bills even after the payment period has expired. But Leifheit need not fear sanctions – the company had taken pertinent measures in its Allgemeine Einkaufsbedingungen (General Terms and Conditions of Purchase). It is specified therein that remittances a few days after the payment date are still considered on-time. And the company is using this margin:. "We firmly stick to it", says member of the management board Claus-Otto Zacharias. Since December 2008, the financial expert is running the business of the company based in Rhineland Palatinate. His first official act was an improvement of the cash situation: He tightened up the dunning system, introduced late interest and dunning charges. On the other hand, he extended the company's own payment periods with its suppliers. Finally, Leifheit radically reduced its inventories – everything the company kept in stock for too long was simply not reordered in the beginning. That's how the company reduced inventories at a value of EUR ten million. The project for liquidity increases comprises a total of 50 items. The result: EUR 28 million in liquid funds are additionally available today.

Lower financing costs
It pays to tap financial sources in one's own company: When you release tied-up funds, you will be more independent from expensive outside financing and able to manage investments on your own. "Companies must start now to optimally set up their finances", says Gerd Kerkhoff, Managing Director of Kerkhoff Consulting. "Irrespective of the national economic situation, we advise companies to check how they can reduce their refinancing costs." Preferred is the optimization of the so-called working capital, or net current assets. Basically, companies will here turn three adjusting screws: They lower their inventories, collect receivables earlier and pay suppliers later. What has long been a standard already with major companies is still the exception in the small and mid-sized business sector. That's been confirmed in a poll by the Institut für Demoskopie (Institute for Public Opinion Polls and Research) in Allensbach and the University of St. Gallen: While 62 percent of German companies with more than 1,000 employees currently endeavor to reduce their working capital, it's merely one third in businesses with fewer than 250 employees.

A study by the consultancy Schulz & Partner shows the chances remaining unused. According to it, the 50 SDax companies could reduce their working capital by about five percent of sales. Thus, EUR 350 million in liquidity would be available. For Axel Kuhn, head of the chair of Factory Organization of the Faculty Mechanical Engineering at the Technical University of Dortmund, such results are representative for the situation in the small and mid-sized business sector: "The German economy still has a lot of catching up to do in terms of working capital optimization. But many companies do not know the processes which would enable improvements."

Criticism due to high inventories
Fast savings are realized especially in inventory management. Consultants are regularly faced with excessive material stocks, exorbitant warehousing costs and lack of connections to suppliers.

The objective is a reduction of throughput times in production: To this end, it is necessary to optimize times of preparation, improve runs and reduce lot sizes. Frequently, efficient inventory management would already be able to considerably reduce the working capital, says Michael Lücke, Head of the Department of Corporate Planning at the Fraunhofer Institute for Material Flow and Logistics in Dortmund. On average, he sees potentials of ten to 20 percent for the small and mid-sized business sector. But why do so many companies leave their chances unused? Reasons for it are manifold: "The small and mid-sized business sector hardly has the competences to expertly handle the necessary financial or logistics planning", says Lücke. "Also, controlling instruments are lacking which would show early on any potentials or risks." Moreover, companies would have to invest: He says that software for purchasing and for inventory management were expensive, as well as qualified staff and consulting services – and results would be uncertain. The consequence: Usually, small and mid-sized businesses would not seek help because of overriding and comprehensive questions regarding working capital management but would much rather want to solve practical problems in the warehouse, says Lücke.

Fast success
That's a mistake – according to consultants: "Companies must tackle the concept in a cross-functional manner and optimize the supply chain overall", says Michael Betzien, Senior Partner at Kerkhoff Consulting. He explains that purchasing, production and financial management would be working together. Basis for it would be a potential analysis. It is usually completed after a few days and allows an estimate in terms of the savings a business can expect. On average, working capital projects would already pay off after three to six months, says Betzien. However, that's not always without conflicts – the mid-sized company Leifheit also had such experiences. Relations were broken off with one supplier because he would not agree to the new payment terms. Others only grudgingly accepted the tough and rigid procedure of their business partner. Some customers might also find it annoying when Leifheit employees call already before the expiration of the payment period to remind them that remittances are to be made on time – even if they had to go through a special telephone training to handling such dunning calls. There was even resistance within the company. Both sales and purchasing departments were not particularly interested in negotiating tougher payment terms with their customers. That's also why Manager Zacharias does not consider the working capital project as concluded but rather as a permanent task. A new reporting system takes care of it where the management board obtains information about overdue customers. "It was a thankless project, but it was worth it", says Zacharias. "And if you are responsible for finances, you won't earn any credit points if you just leave money or funds alone."

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