Liquidity and working capital management measures - PowerPoint Presentation

1. Liquidity and working capital management measures

2. Overcoming a liquidity crisis (cont.)The possibilities of internal financing sources depend strongly on the company and the respective industry. If the company has been successful in the past and has substantial assets or a large number of machines, there are alternatives to debt capital or the injection of equity.OPTION04Working Capital Management (see following slides)Working CapitalOPTION05Installation of a liquidity management officeCash ManagementOPTION03Sale of assets required for operations - Sale and lease backSale and Lease BackOPTION01Release of existing Liquidity reservesLiquidity ReservesOPTION02Sale of non-operating assets (e.g. reserve land or former production, storage and operating facilities)Non Operating AssetsInternal Financing Sources

3. Overcoming a liquidity crisis (cont.)In the event of an acute liquidity crisis and concrete insolvency risk, all relevant options should be used.Provided that a coherent restructuring concept is in place, many parties involved are often prepared to support - otherwise, in case of doubt, they too would face a high risk of loss.Overview of measures for prevention of insolvency and liquidity crisis by measure ownerShareholderEquity injectionShareholder loanDeposit payoutTax creditorDeferral of tax liabilityDecreeSuspension of executionSupplier creditorsProlongation of the term of paymentDeferralPayment by instalments agreementInterest remissionSocial insurance agencyDeferral of contributionsSuspension of executionCreditors (banks)Increase in credit linesInterest concessions ("restructuring interest")ProlongationWaiver of repaymentPublic sectorSubsidiesGuaranteesApproval of structural crisis cartels

4. Immediate operational measuresComplementary objectives serve to secure equity and liquidity in the short term.  In the medium term to make the company competitive on the cost sideAvoiding the risk of over-indebtednessPrevention of impending illiquidity

5. Working Capital ManagementWorking Capital Management or Working Capital Controlling is intended to optimally control the so-called working capital, the capital tied up in a company0102Structural MeasuresShortening of processing timesReduction of product variety, complexity and special designsIntroduction Modular designSet up consignment warehousesMerging of warehousesOptimization of the stock accountingOperative MeasuresSpecial sale of old stocks, return to suppliersbringing forward customer-related production ordersReview/reduction of lot sizes (especially in the case of missing customer reference)Check the relationship of setup costs to inventory financingChanges in the supplier relationshipsImprovement of the planning system/-accuracyWorkingCapital Measures

6. Working Capital Management (cont.)Dunning is the process of methodically communicating with customers to ensure the collection of accounts receivable. Communications progress from gentle reminders to threatening letters and phone calls and more or less intimidating location visits as accounts become more overdue. Dunning SystemIs there a ban on dunning? Reasons?When is the 1st reminder sent? How often?What happens after the last dunning level?How are reminders formulated?Exploitation of legal remedies?Who initiates the reminders?Who is involved in process?How is the sales department involved?Cause analysis of overdue receivables?Structure of Accounts ReceivableAgeDomestic/ foreignCountries (payment history)DivisionsCustomers / buyers (creditworthiness)Sales responsibilities010203Payment TermsWhich conditions on which basis?Who determines new conditions?Amount of average payment term?Procedure with down payments?Which means of payment?AccountsReceivable

7. Working Capital Management (cont.)The payment of invoices at the right time can maintain liquidity in the company and increase interest incomeThe terms of payment are determined by the suppliers when the order is placed and only in a few cases is there room for manoeuvre for the clientThe following levers can be considered for the derivation of measures:Invoice Receipt VerificationInvoice receipt date should be used as the basis for calculating the due dateCalculation of cash discount deductionsChecking whether it is economically more sensible to take advantage of a discount than to take advantage of a payment termMinimize payment runsBundling the payment of invoices into only one or two payment runs per weekOptimization of liabilities

8. Working Capital Management, 3 levels of actionIn particular, three central levels of action are available to optimize working capital:Optimization of the Accounts ReceivablesOptimization of stocks and supplyOptimization of the accounts Payable Stocks andSupplyReduction of inventoriesSpecial salesJust-in-time production, consignment stockAccountsPayableExtension of payment periodsAccountsReceivablesFactoring / Optimization of the dunning process,Shortening the payment periodsRisk hedging (creditworthiness, price changes, interest rate and currency risks)cash pooling

9. Working Capital Management: The Operating CycleCurrent assets are needed because sales do not convert into cash instantaneously; there is always an operating cycle involved in the conversion of sales into cashThe Operating cycle is divided into three phases:Acquisition of resources such as raw materials, labor and overheads.Manufacturing of products, this includes conversion of raw materials into work in progress and finished goods.Sales of the finished product either for cash or on credit  (accounts receivable)The length of the operating cycle of a firm is the sum of the inventory conversion period and debtors conversion period . (Gross Operating Cycles)CashAccounts ReceivableInventoryOperatingCycle

10. Working Capital Management - Inventory Conversion PeriodThe inventory conversion period is the total time needed for production and sales. It includes raw material conversion period, work-in progress conversion period and finished goods conversion period.   

11. Working Capital Management - Debtors Conversion PeriodThe debtors conversion period is the time required to collect the outstanding debts from customers. However, a company may acquire goods or services on credit thereby positioning payment.The period during which payment is postponed is known as payable deferral period. It is the length of time the firm is able to defer payments on various purchases. The difference between the(gross) operating cycle and payable deferral period is known as net operating cycle or cash conversion cycle.   

12. Exemplary financial measures: Sale and Lease BackLease-back, sale-lease-back and sale-and-rent-back are synonymous terms for a special form of leasing in which an organization sells an asset (property, machinery or vehicle, but also intangible assets such as brands or patents) to a leasing company and simultaneously leases them back for further use.One-off liquidity effect / realization of hidden reservesLong-term liquidity burden from lease paymentsMuch more difficult with used goods than together with acquisition of new goods (manufacturer leasing)Object value consideration instead of company assessment (at least in the starting point "Creditworthiness of the object")Pays leasing instalments over the contract periodLeases machineryor property backReceives cashpaymentSells machinery or propertyCompanySale and Lease Back Organization

13. Exemplary financial measures: FactoringFactoring is a method of sales financing in which the supplier sells its receivables from the delivery of goods to a financial institution.Sale of receivables with transfer of the credit risk (genuine factoring)orwithout transfer of the credit risk (fake factoring)CompanyCustomerFactoringOrganizationPays out claimDeliversGoods / ServicesSells ClaimsChecks CreditworthinessPays Claim

14. Exemplary financial measures: Shareholder LoanEasy and quick to implement (even informal)A classic problem of founder-operated medium-sized companies:Often the crisis is not recognized or recognized too late or it’s considered as a short-term weaknessBecause next year "for sure" will be better, the owner provides his own capitalThis capital is later missing as an own contribution to the restructuringIn the event of insolvency, shareholder loans are subordinatedCompanyCompany pays interest and amortizationShareholderShareholder provides a Loan to the company

15. Exemplary financial measures: Equity InjectionInserting equity in the form of capital or cash for the purpose of lowering debt ratios and/or providing capital to stimulate growth.Considerations:-Additional financing by the existing shareholders is easier: "we know each other".It does not change the shareholder structure and relationships (at least as long as everybody tags along)No company valuation requiredProblems arise when only some of the existing shareholders participate or external investors join: Who bears the risk?What does the investor get (what he does not already have)?

16. Exemplary financial measures: Equity InjectionHOWEVERMany owners are hasty in injecting equity in the crisis. It is important to first develop a restructuring plan and determine the overall capital requirements. If this exceeds the possibilities of the owners, further sources of financing must be found. These usually require significant contributions from the owners. If the money is then already tied up in the company, banks in particular often refuse to support them.