Dash for Cash

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

Despite an impressive working capital track record, a 50% plunge in profit at Indesit in 2005 led to the creation of a new three-year plan that meant an even stronger emphasis on cash generation. Operating cash flow was added to the incentive scheme for senior and middle managers, who subsequently released more cash from Indesit’s already lean processes by “attacking the areas that were somehow neglected,” Crenna says.

Hidden in the dark corners of the accounts-receivable department in the UK’s after-sales service operation, for example, were a host of delinquent, albeit small, payments — in some cases overdue by a year or more. “If you don’t put a specific focus on these receivables, it’s very easy for them to become neglected,” Crenna says. “In theory, nobody worries about collecting £20. In reality, we were sitting on a huge amount of receivables, though each individual bill was for a small amount.”

More trapped cash was found in the company’s spare-parts inventory. The stock is worth around €30m today compared with around €40m three years ago. “This was a good result that came just from paying the same level of attention to spare parts as to finished products,” Crenna says. In general, Indesit has been able to improve working capital performance through “fine-tuning rather than launching epic projects.” Over the past two years, according to REL, Indesit has released €115m from its working capital processes.

Liberation Hero

With cash now an increasingly scarce resource, companies will want to tap internal sources of funds, however small. Even an industry-leading company such as Indesit has been able to shake sizeable sums from “areas of inefficiency that were thought to be immaterial,” Crenna explains. Now he’s mulling over a more targeted approach to extending credit to customers and, when the markets improve, the possibility of securitisation.

But in the short term, the CFO expects Indesit’s working capital to rise from its currently low level. “I want it to remain a concern,” he says. “If the CFO doesn’t fly the flag about the importance of working capital management, it’s easy for the company to lose focus and end up with trapped cash.”

At MAN, Hornung is similarly eagle-eyed. “You have to push people, follow up and have power behind it,” he says. “Otherwise, there will be a lot of discussions, a lot of good ideas, but no execution.” The company must continue to improve, Hornung maintains, as by his calculations MAN still lags behind its key competitor, Volvo, by 10-15 days of working capital. (REL’s calculations put them even further behind.)

When the current working capital programme ends next year, “we will start again,” the CFO says, “analysing which areas we can still do better.” As he already knows, and many other finance chiefs are now learning, abrupt changes in business conditions can hit companies hard. Cash is the best cushion.

Jason Karaian is deputy editor at CFO Europe.

Payables Panic

Rather than double efforts to collect what they’re owed, many companies’ initial reaction to the credit crunch has been to squeeze suppliers. At least, that’s one way to explain the jump in days payables outstanding in the latest working capital scorecard for Europe’s largest 1,000 firms. (See “Feel the Squeeze” at the end of this article.)

While some of it may be due to a unilateral refusal to pay on time by cash-strapped companies, there are “win-win” ways to extend payment terms, notes Gavin Swindell, European managing director of REL, a research and consulting firm. “A lot of businesses aren’t worried about getting paid in 40 or 45 days, but are more interested in the certainty of payment on a specific date,” he says.

Jas Sahota, a partner in Deloitte’s UK restructuring practice, says that three-month extensions are common, “as long as the supplier can see that there is a plan.” In times of stress, he says, it’s important to negotiate with only a handful of the most important partners — squeezing suppliers large and small only generates grief and distracts employees with lots of calls.

More fundamentally, the benefits of pulling the payables lever in isolation is “questionable,” notes Andrew Ashby, director of the working capital practice at KPMG in London, “especially as the impact on the receivables balance is typically a lot more than the payables balance.” It’s surprising, he says, to see so little movement in average collection times in the latest data.

Improving collections, such as achieving longer payment terms, relies on the strength of relationships built over time, notes Robert Hecht, a London-based managing director of turnaround consultancy AlixPartners. “You can’t wait for a crisis, and then expect suppliers to step up and be your best friends.”


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