Off the Shelf: The 2004 Working Capital Survey

Low inventories drove down working capital last year. But will that continue as the economy improves?

Civility Returns

Overall, companies in our survey showed modest improvements in collecting receivables and, surprisingly, a drop in the amount of time they took to pay their own bills. Last year, days payables outstanding (DPO) jumped 3 percent amid reports of companies mercilessly squeezing suppliers or simply delaying payments. This year’s trend suggests a degree of civility has returned at both ends of the supply chain, as companies work out terms with customers and suppliers.

Pentair’s experience is typical. Harrison says DPO was at 28 days when he came to the company. At the same time, salespeople were using payment terms as sales incentives, causing days sales outstanding (DSO) to soar to 72 days. “If you sell and collect in 72 days and buy raw materials and pay in 28 days, that says you are a bank,” says Harrison. “And we are not a bank.”

Eschewing what he says is the common industry habit of setting terms at 30 days but paying in 50, Harrison raised the company’s stated payable terms from 30 days to 45. “The easiest thing to do to get a cash-flow bump is to withhold payables,” he says, “but we don’t think that’s right.” Still, some of his own customers followed that course, which initially made even the longer payable terms he had set for Pentair difficult to meet.

Indeed, Harrison explains his company’s recent drop in DPO — normally not considered a working capital plus — as a matter of morals, not metrics. “We are very uncomfortable withholding [payment] if our terms are 45 days, but for a while we did,” he says. With customers delaying payment to Pentair, he explains, the company’s own suppliers were told they would have to live with slower payments. “We allowed payables to run up in excess of 50 days,” says Harrison. “More recently, we have been pulling that back down to be more in accordance with our stated terms, but also [in accordance] with our values.” In July, Harrison also reported that Pentair had beaten its goal of reducing DSO to 55 days.

Cash Culture

“Pentair, like Dell, has got it right,” says REL’s Payne. “Too many companies play year-end games to boost cash figures.” Only process-based improvements, he says, provide sustainable cash-flow benefits. “The more closely you work with your customers, the better your forecasting and the information you provide to your suppliers, and the more efficient the whole operating cycle,” he says.

Whether companies reach the “next level” of working capital performance — what Payne describes as “a seamless trade-off between customers, suppliers, and the company in the middle” — will also depend on whether companies are able to maintain their focus. Harrison attributes much of his success in lowering Pentair’s DWC to his CEO’s daily interest in the company’s cash flow. “Cash flow has become a part of our culture,” he says. “Every week, the first item on the agenda at our officers’ meeting is cash flow.”

It’s not clear, however, whether U.S. companies will continue to place that sort of emphasis on cash. Corporate America is now awash in liquidity (see “Too Much Cash,” August). The question for the coming year is how companies will use that cash — and whether its presence will undermine working capital efforts. “We have seen a big switch from a focus on the P&L to a focus on the balance sheet,” says Payne. “Are we going to see that focus switch back? I hope not.”

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