Active management of working capital is critical in today's European business landscape. Ralf Kesten, Sales Director at cflox, provides insights into the challenges companies face, including the industry-specific differences in Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO) and Days Payable Outstanding (DPO).

In this article, he discusses the impact of uncertainty in the supply chain and the strategic dialog between customer and supplier relationships while introducing cflox pay, a solution to simplify working capital management for CFOs and treasurers.

Industry-Specific Differences in DIO, DSO and DPO Cases

Ralf, can you explain how the working capital indicators DIO, DSO and DPO differ in different industries and what common problems there are?

Ralf Kesten: In many European markets, DIO, DSO and DPO are generally very different depending on the industry. In the manufacturing industry, for example, high DIO values are common, as large quantities of raw materials and finished products have to be stored there. In contrast, service-oriented companies may have a lower DIO, as they only need to maintain a warehouse to a limited extent.

Despite these differences, the pressure on working capital remains a common challenge. Companies are constantly looking for ways to optimize their cash flow while balancing the need to invest in growth and maintain liquidity. The key is to manage these elements efficiently to ensure operational stability and support strategic initiatives.

Inventory Management, Customer Payment Terms and Supply Chain Financing

What are the current trends and challenges in active inventory management and supply chain financing (payment terms for customers and suppliers)?

Ralf Kesten: A significant increase in stock levels has been observed recently. This is primarily due to supply chain disruptions and uncertainties that force companies to increase their stock levels to ensure continuity of production and meet customer demand. Although this strategy reduces risk, it also ties up considerable amounts of working capital. This is also due to the price increase (inflation) of many product groups in the last two to three years.

On the other hand, tighter management of customer payment terms leads to better payment behavior. However, this is often at odds with growth objectives, as stricter terms can deter potential customers or strain relationships with existing customers.

Supplier financing is another critical area. Companies are faced with rising costs and legal restrictions on supplier payment terms, so it is crucial to negotiate terms that balance cash flow needs with maintaining strong supplier relationships. Rising costs and regulatory compliance make effective working capital management even more complex.

Working Capital Levers and their Stakeholders

Can you elaborate on the three working capital levers and the associated conflicts with the respective interest groups?

Ralf Kesten: The three most important levers for active working capital management are reducing inventories, shortening payment terms for customers and extending payment terms for suppliers. Each lever has its own stakeholders and potential conflicts.

When reducing inventories, the main aim is to minimize the amount of capital tied up in stock without compromising on availability and quality. This requires close coordination with the supply chain and production teams. The main conflict lies in balancing cost savings with the risk of stock-outs, which can disrupt operations and impact customer satisfaction.

Shortening payment terms for customers aims to accelerate cash inflow by getting customers to pay faster. The sales and customer service teams are key players here as they need to maintain strong relationships and ensure customer satisfaction. The conflict arises when stricter payment terms clash with efforts to increase sales and revenue, which can lead to strained customer relationships.

Extending payment terms for suppliers helps extend the time it takes to pay suppliers and thus maintain liquidity for longer. Procurement and finance teams must work together to negotiate favorable terms without damaging relationships with suppliers. The challenge is to secure the best prices and reliable supply while complying with legal restrictions and maintaining a positive relationship with suppliers. Furthermore, in many cases it is simply impossible to negotiate longer payment terms with suppliers due to a lack of purchasing power.

Supply Chain Finance Solutions (SCF)

How can supply chain finance solutions overcome these challenges in the area of working capital, and what distinguishes them from other solutions?

Ralf Kesten: There are SCF solutions that stand out as unique working capital tools due to their ease of use and simplicity. Unlike solutions that require significant changes to processes or extensive training, innovative solutions such as cflox pay can be seamlessly integrated into existing systems.

The solution gives CFOs and treasurers full control and enables them to manage working capital more effectively. Companies across Europe can thus optimize their cash flow by strategically balancing payment terms for customers and suppliers, which not only helps to improve liquidity, but also enables better decision-making and increases overall financial stability.

Traditional SCF solutions usually only cover 15-25% of the supply chain. We are therefore currently seeing that cflox pay is also becoming increasingly important as a supplementary solution in the solution mix for large, listed companies. Strategic KPIs for companies in this context are regularly working capital management, free cash flow management and balance sheet structure management (leverage).

In addition, cflox pay can significantly support ESG initiatives by integrating ESG criteria into supply chain financing. Again, without the need to involve suppliers.

About cflox

cflox is an international payment institution that combines payment transactions with working capital and financing to create unique solutions. With a focus on supply chain finance, cflox offers its customers the optimization of payment terms and cash flow without the involvement of suppliers.

For more information visit cfloxpay.com

Press contact

Leonie Bauer

Content & Communications Manager

cflox GmbH

Gaußstraße 190c

22765 Hamburg

l.bauer@cflox.com