Liquidity is one of those things you only miss when it’s gone. Boston Consulting Group professionals Tobias Wens, Ralf Moldenhauer, Jan Lindenberg and Jens Kengelbach take that truism to heart as they describe the concept of “net working capital” (NWC) and why companies should be paying more attention to it. In their clearly drawn framework for approaching NWC management, they also offer sound guidance to executives seeking to identify their best strategies to optimize liquidity.
Increasing a company’s “net working capital” (NWC) is a good way to improve its profitability.
The 2009 European financial crisis precipitated liquidity problems for many companies, forcing them to reduce debt and streamline their operations. In 2019, an extensive study of 700 companies, spanning 15 industries and 16 European nations over the 2013–2018 period, aimed to learn how firms are handling their net working capital, defined as “accounts receivable plus inventory minus accounts payable.” This metric drives cash flow, which in turn dictates a business’s needs for outside financing and its resiliency in downturns. A company that increases its NWC can fund its own business plans. As a source of cash, NWC...
Tobias Wens, Ralf Moldenhauer, Jan Lindenberg and Jens Kengelbach are professionals at the Boston Consulting Group.