Dash for Cash

With credit at a premium, freeing up funds from working capital gains a new urgency.

Work Out

As Hornung can attest, it was much harder for finance chiefs to focus their colleagues’ attention on cash before the credit crunch. When he joined MAN in 2004, one of his first contributions at a board meeting was to claim that the group could release at least €1 billion from the €5 billion that was tied up in working capital. Gaining support for this goal occupied Hornung for the best part of the following year, as colleagues came up with “all sorts of arguments about why this was not possible,” he recalls. Results were positive and cash flow was healthy, so why was he agitating for widespread changes? Based on past experience, he argued that “more liquidity is always good. Since last August, nobody argues against having more liquidity on the balance sheet.”

According to REL, MAN released more than €1.3 billion in cash over the past two years, cutting DWC from around 160 in 2005 to 120 in 2007. For companies now scrambling for cash, the measures taken by MAN and other forward-looking firms could serve as useful guides to freeing up much needed funds from working capital.

Hornung’s breakthrough came in 2006, when MAN sold 65% of its printing-systems business to a private equity firm. Shortly after the sale, the printing firm’s chairman, a long-time critic of Hornung’s working capital reduction plan, conceded that Manroland — as the firm is now called — could indeed release millions of euros of trapped cash. This change of heart kickstarted a MAN-wide initiative which will run through to next year.

Within two months, “we found ways to achieve my famous €1 billion reduction in working capital,” says Hornung, who chaired the project’s steering committee. The first steps were to adjust incentives for staff, alter collection conditions and change payment practices.

Each quarter, MAN’s board decides on a credit line to extend to each subsidiary from its central cash pool. A hefty 14% interest rate is now levied on any amount drawn beyond this limit. Charged to the unit’s P&L, this affects profit-linked bonus schemes for a number of employees.

Collections and payments offered plenty of “low-hanging fruit,” Hornung says. At the start of the working capital project, he identified more than 300 payment terms. Today, this has been reduced to around 30 standard collection conditions. Hornung also changed the finance department’s payment run from Friday to Monday. Suppliers receive payments at the same time as always, but now it is MAN, rather than the bank, that earns a weekend’s extra interest on the cash.

Spin Cycle

Such simple measures generate a lot of cash for a company of MAN’s size. Another company that finds it’s the little things that count — quite literally — is Indesit.

In 2004, when Andrea Crenna joined the €3.4 billion Italian white-goods manufacturer as CFO (it was then known as Merloni Elettrodomestici), it was leading its sector in terms of working capital performance, with a ratio of net working capital to sales of only 3%. At the end of last year, the ratio was down to 0.1% — or 0.1 DWC — the lowest it could go without the company turning into a retailer or utility, Crenna jokes. The median DWC for Europe’s household-durables sector is 100.


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