Risk & Credit

Working capital management

Cash flow, credit policy, creditworthiness - they all and much more belong to “Working capital management” (WCM). On this page we explain the most important terms around working capital management. For many topics you will find an article recommendation with further information. Simply click on the appropriate link.

Table of contents:

Working capital management

Cash flow

Receivables management

Growth

Creditworthiness

D&B Business Credit Reports

What does working capital management mean?

Working capital management consists of three pillars:

  • receivables management
  • creditor management
  • inventory management

The first two are particularly important for the financial officer or CFO. Quickly summarised, this means that debtors can be called in quickly and creditors can be paid late.

 

What is a credit policy?

The credit policy defines all the processes and principles that a finance department uses to decide who it grants credit to and how much credit it grants.



What exactly does cash flow mean?

The term cash flow defines the flow of money generated by a company within a defined period, such as a quarter or financial year. Cash flow means something other than liquidity. It indicates how much funding is available at a given time. The cash flow refers to a period of time and measures the changes. So it's an economic flow definition.

How do I actively manage cash flow?

  1. Define a credit policy and specify the credit limits, the accepted means of payment and the information about the customers that you require.
  2. Estimate the fixed and variable costs and create substantial reserves for the unexpected.
  3. Plan when the cash flow from customers arrives.
  4. Make forecasts and plan. Keep a meticulous eye on inputs and outputs and take seasonal influences into account.
  5. Get advice from professionals or hire an accountant.
  6. Pay creditors on time or even earlier. This gives you a good credit rating and thus better conditions for taking out loans.

 

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Why is it important for you as an entrepreneur to actively control cash flow?

This is important in order to always have sufficient liquid assets. This ensures that you have the resources for investment and growth. You will also be able to meet your own liabilities on time or even earlier. This has a positive effect on your own creditworthiness, which in turn is a prerequisite for taking out loans yourself at good conditions. It is also important to build up reserves for unexpected expenses or if orders fail to materialise.

What is receivables management?

Receivables management includes all processes related to the creation and processing of receivables from customers. Ideally, the credit policy should set out the principles and guidelines.

What is the benefit if you actively engage in receivables management?

The aim of receivables management is to optimise cash flow, minimise risks and exploit potential.

How do I ensure that my customers pay their bills quickly?

Make it as easy as possible for the customer to pay the invoice. Make sure that all information on the invoice is complete and correct. Offer different forms of payment such as invoice, direct bank transfer or PayPal. Grant discounts or agree payment terms. If the payment is not made, search for a personal conversation with the customer. You can also use dunning notices, debt collection or legal enforcement. Avoid debt collection if possible, because it is always unpleasant and expensive.

What is the payment behaviour of Swiss companies like?

Swiss companies paid 23.6% of all invoices late in 2018. The payment discipline fell by 0.5% compared to the previous year. The average delay in 2018 was 14.6 days, half a day more than in 2017. By far the most unreliable companies paid their bills in 2018 in Basle City. In 2018, at 48.2 %, almost half were too late - in  comparison with 2017 it's even 5.1 % worse. On the other side is Appenzell Innerrhoden. The companies located there paid almost 90 % of all invoices on time.

How do I write a dunning notice?

Dunning is not regulated by law in Switzerland. In principle, you have free choice as to how, when and how often you send reminders. Nevertheless, the dunning process should be defined in the credit policy. Ideally, you send a payment reminder, a first  and a second dunning notice. If that doesn't help, you initiate debt collection or legal prosecution. However, you should always prevent this from being expensive and unpleasant if possible. It is better to make it as easy as possible for customers to pay your bills.

How does creditor management work?

Creditor management is the active management of creditors with the aim of getting the most out of suppliers and payment terms. The aim is to tend to pay invoices as late as possible without jeopardising the good business relationship and your own creditworthiness.

What is a supplier credit?

A supplier credit is granted when you deliver goods or services to a customer on account.

How do I promote growth with working capital management?

Working capital management ensures that you always have sufficient liquid assets at your disposal. This will give you enough money to invest, which in turn will boost growth.

How do I identify potential with D&B Credit?

There are several indicators that show the potential of a customer. Some come from a credit platform such as D&B Credit. There you will find scores and ratings such as PAYDEX®, the Failure Score, the Overall Business Risk and a maximum credit recommendation. The better these values are, the greater the potential. Combine this information with your own experiences with the customer. If the customer pays reliably and quickly, this is a sign of the expansion of the business relationship.

What is creditworthiness?

Creditworthiness is the will and ability of an enterprise to repay debts.

How do I check the creditworthiness of a company

Credit agencies provide credit information about companies. They specialise in collecting information about companies, condensing it and creating meaningful and easy-to-understand scores and ratings.

How do I check the creditworthiness of a company abroad?

Credit agencies not only provide credit information about companies in Switzerland, but also about those abroad. Dun & Bradstreet, for example, has a database of more than 300 million companies and thus has virtually global coverage.

Which companies should I not do business with?

There are so-called red flags or exclusion criteria that exclude a business relationship from the outset. These are known as high risk triggers or special events:

High risk triggers:

  • Overzealous owner
  • Unclear business start
  • Splendid company name
  • Extremely robust financial report
  • Untypical payment experiences
  • Payment experiences from only one sector
  • Business activities of other failed or fraudulent firms known
  • “Too good to be true" companies for their size and time in business

Special events:

  • Bankruptcies
  • Burglaries
  • Embezzlements
  • Change of business partners
  • Fires
  • Natural disasters
  • Discontinued operations
  • Criminal activities

How can I find companies in D&B Credit?

D&B Credit has an outstanding search function. It ensures that you can find the company you want quickly and accurately in the universe of over 300 million companies worldwide. D&B Credit uses an auto-complete feature for this purpose. The filter function only shows you the hits that really interest you.

Which Business Credit Reports does Dun & Bradstreet provide? Which information do they offer?

D&B Rating: The measuring system developed by Dun & Bradstreet. It gives an overview of the financial strength and size of the company. The rating is based on payment performance, public records and company age.

Failure score: Also known as the Financial Stress Score, it predicts the likelihood that a company will cease operations or go bankrupt in the next 12 months without repaying its debt. D&B makes a comment on each company you test that explains the assessment.

PAYDEX®: It collects payment experiences and analyses the payment performance of companies. It says whether a company pays its bills on time or not.
Overall Business Risk: Helps to accurately assess risks and make the right credit decisions. In this way you avoid loss and at the same time skim off slumbering potentials. The Overall Business Risk consists of two components:

  • Aggregated risk assessment
  • D&B credit recommendation

How does portfolio management work in D&B Credit?

D&B Credit maps the entire customer portfolio in a clear matrix. The x-axis shows the age of the receivables with your customers, the y-axis the risk assessment of Dun & Bradstreet. Each field in the table shows the percentage of companies with these criteria - at D&B Credit Advantage even the total of the corresponding receivables in CHF or your chosen currency.

You can see at a glance whether and where you have outstanding accounts. A possible strategy is the streamlining of the dunning process.

How do I promote growth with D&B Credit?

D&B Credit helps you to show your customers’ potential. If all credit and scores are in the good or very good range, if the customer has an impeccable payment history and has not exhausted the credit limit, then the customer seems to be a good option to sell more.