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Got stuck during an interview - Working capital reduction

Anonymous A asked on Dec 02, 2017 - 2 answers

Hi guys,

as mentioned in the title, I was asked to solve a small case during an interview and I got stuck.

I don't think the case/question itself was complex, I completly blame my lack of preparation.

I will really appreciate it if you can help me crack it.

Input: In a project through which the working capital of a BU needs to be reduced by 100 M Euro over the next 2 years, the focus sould be on inventory of receivables. A teamn of an international global employees working within this BU from different countries was built to propose an action plan, in order to reach this goal.

Question: came up with a concret plan and steps tp do so? how would you proceed?

Thank you for helping out!

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Oleksandr (Alex)
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replied on Dec 04, 2017
Very experienced ex-McKinsey consultant with cross-country expertise
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Simply accounting question.

Working capital = current asset - current liabilities

Working capital = long-term liabilities + equity - fixed assets

Try to understand where the main value sources are at the moment (what is the value of each balance sheet line). And then assess which one you easily can shrink. May be different alternatives. And then you need to understand how much resources you need (both time & cash) to make it happen.

Anonymous B updated his answer on Jan 09, 2019

You can easily approach this question by looking at the different elements of working capital:

Working Capital (WC) = Current Assets - Current Liabilities

Current Assets = Inventories + Accounts Receivables

Current Liabilities = Accounts Payables (short term debt)

  1. To get an understanding of the levels of working capital that are required to run a business in the given industry, benchmark with competition
  2. Prioritize an area to optimize WC to reach targeted level - i.e. inventories
  3. To improve inventory levels, do an ABC analysis and try to identify slow movers (i.e. by apply stock level formulas like stock/average turnover) - you should reduce stock products, which bind lots of capital and sell slowly = if not much room to optimize inventories, look into accounts receivables (here you can try to make customers pay fasterby sending out reminders, hiring debt collectors or instead get faster liquidity by selling your claims to factoring firms)

(edited)

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