Each component of working capital (namely inventory, receivables and payables) has two dimensions-time and money. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money expended by reduce inventory levels relative to sales or holding payables longer, the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, organizations can reduce the cost of bank interest or have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future growth.

DAYS WORKING CAPITAL (DWC)

DWC = (AR + inventory - AP) / (net sales / # of days)

• A negative change in DWC represents an improvement; a positive number indicates deterioration in DWC

DAYS SALES OUTSTANDING (DSO)

DSO = Accounts Receivable / (net sales / # of days)

• A negative change in DSO represents an improvement; a positive number indicates deterioration in DSO
• Soltec has developed the following major Best Practice Solutions™ to improve Days Sales Outstanding:
  • Order-Revenue Management

DAYS PAYABLES OUTSTANDING (DPO)

DPO = Accounts Payable / (net sales / # of days)

• A positive change in DPO is an improvement, a negative change indicates a deterioration in DPO
• Increasing DPO improves working capital and increases cash on-hand
• Each organization must determine the time value of money based on their borrowing strength to objectively evaluate discount policies offered by suppliers
• Each of Soltec’s solutions focus on improving Days Payable Outstanding while ensuring all applicable discounts are properly taken and supplier relationships remain positive
• Soltec has developed four major Best Practice Solutions™ to improve Days Payable Outstanding:
  • Evaluated Receipts Settlement
  • Procurement Card
  • Payment Terms
  • EFT

DAYS INVENTORIES OUTSTANDING (DIO)

DIO = Inventory / (net sales / # of days)

• A negative change in DIO indicates an improvement; a positive change indicates deterioration in DIO.
• Soltec has developed the following Best Practice Solution™ to improve Days Inventories Outstanding:
  • Production Demand Replenishment

Please review each of above mentioned solutions pages for the specific impacts for each solution

Improvements in working capital (cash flow) can have a significant impact on your organization’s financial measurements and provide the necessary funding for acquisitions, buy-back of stock, new projects/products and overall company growth.