No Time to Lose: The 2008 Working Capital Scorecard

Tempted to extend payment terms? That's one sign that working capital demands your immediate attention.

Read the complete results of the 2008 working capital survey, or review just those results that appeared in print.

Beware your survival instincts: they may dampen corporate performance more than you might expect. With a recession looming or quite possibly upon us, it can be tempting to ease up on receivables and retain inventory in order to placate cash-strapped customers. But those seemingly small sacrifices actually impose a steep cost, diverting precious cash to working capital. CFOs who want to bolster the case for strict working-capital policies may find plenty of support in the 11th annual CFO/REL Working Capital Scorecard.

The 2008 scorecard ranks working-capital performance at the largest 1,000 public U.S.-headquartered companies. Overall, 61 percent of the 57 industries covered in the scorecard improved their days working capital (DWC) number last year by an average of 8 percent. But there is still much room for improvement.

In a market climate where pennies per share affect shareholder returns, changes in working capital invite scrutiny. Taking note, one securities analyst has called working capital his microscope into the competence of a management team.

Reducing working capital confers benefits for any industry, from high tech to chemicals to manufacturing. “Every dollar we free up from working capital can be deployed back into the business,” says Ken Hannah, CFO of MEMC Electronic Materials Inc., a $1.9 billion silicon-chip maker.

On a weighted working-capital basis, the 10 most improved companies released $1 billion or more each, a 26 percent improvement on their average DWC. Such opportunities beckon to CFOs. Were a median company in the 2008 scorecard (approximately $10 billion in sales) to match companies with the leanest working capital, REL estimates that the company could trim its working capital by $1.4 billion, or 14 percent of sales. That’s a tidy sum for finance executives to invest in growth without tapping credit lines. Savings in interest expense go straight to the pretax bottom line, notes Karlo Bustos, financial analyst at REL, a division of The Hackett Group Inc.

Scorching Pace

As the current working-capital leader in the semiconductor sector, MEMC set a scorching pace last year, trimming its working capital to just 13 days from 36 days in 2006 and 46 days in 2005. The most recent one-year improvement liberated nearly $340 million in cash flow, REL estimates, a sum approaching 18 percent of 2007 sales.

Besides the virtues of leaner operation and ready access to $340 million, another way to calculate the payoff fits the back of an envelope. Had MEMC been forced to borrow $340 million to finance working capital at a modest 5 percent rate, the tab for interest payments (excluding amortization) would drain $17 million a year from cash flow for each year the debt remained outstanding.

Besides bracketing capital expenditures between 10 percent and 15 percent of revenue, CFO Hannah credits MEMC’s success to a “maniacal” focus on cash conservation and trimming costs — twin benefits of better working-capital management.


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