Corporate Finance, 6th Edition

Chapter 49MANAGING WORKING CAPITAL

Is it supply chain management or is it strategy? It's finance, General!

On aggregate in Continental Europe, working capital represents large amounts (c. 15% on capital employed). Customer credits (and symmetrically, supplier credits), which are commercial loans between companies, amount to nearly three times the amount of short-term loans granted to corporates.

The similarity between the amount of working capital and that of net debt is not completely coincidental, as often these two items behave in concert. An increase in working capital means an increase in net debt, as a large number of companies can testify following their experiences in late 2020. A drop in working capital often means a drop in net debt, as a large number of companies can testify following their experiences in mid-2020.

Having said that, working capital management does not involve reducing it at all costs in a simplistic fashion, as it also contributes to the overall equilibrium of the company. This is an often overlooked fact.

Finally, the problems and the amounts of working capital are not identical for all sectors. There is a world of difference between industry (management of work-in-progress, credit limits for major customers, etc.) and the services sector.

Section 49.1 A BIT OF COMMON SENSE

Working capital is an investment, like any other, even if on occasion there is less choice involved (for example, when a customer “forgets” to pay by the due date and ...