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.

“It all comes down to asset turns,” Hannah reports. Direct-order contracts transfer ownership of goods to customers once those goods leave MEMC’s shipping docks. The company trimmed inventory levels by adopting more just-in-time manufacturing processes. On the receivables front, MEMC reduced its days sales outstanding (DSO) by leveraging the current high demand for its products through requiring some customers to pay for goods before delivery.

MEMC does not stretch out payments to suppliers, however. “We’re a cash generator,” Hannah explains. “I can take that cash, invest it, and earn, say, 4 percent. Alternatively, I can pay my suppliers 30 days earlier and get, in some cases, a 10 percent discount on their product.”

A determined focus on cash conservation characterizes top working-capital performance in every industry. “We have a very experienced management team that has seen some of the best of times and some of the worst of times in a cyclical industry,” says Dan Greenwell, senior vice president and CFO of Terra Industries Inc., a $2.4 billion manufacturer of nitrogen fertilizers that has pared its DWC to 30 from 51 over the past two years, far below its industry median of 72. Like MEMC, Terra has taken advantage of recent robust demand to negotiate better sales terms. It also has shuttered distribution centers to minimize inventories and prepays supplier invoices in exchange for discounts.

Overall Improvement

Excluding automakers, which skew results disproportionately due to their lending operations, the 2008 results show overall, if marginal, improvement since last year’s scorecard, but not in every corner of working-capital performance. Days inventory outstanding (DIO) shrank, on average, to 29.7 days from 30.7 days. Somewhat surprisingly, despite a looming recession, REL found only a slight uptick in days payables. In fact, says REL’s Bustos, big companies seldom conserved cash in 2007 by making vendors wait. For the group, excluding automakers, days payables outstanding (DPO) edged up only slightly, to 32.5 days from 32.1. DSO also moved in the wrong direction, edging up to 41 days from 39.7 in 2006 and 40.5 in 2005.

Altering key elements of its business model triggered dramatic improvement at Source Interlink Cos., a $2.3 billion magazine publisher and distributor of music CDs, DVDs, and magazines. The company crossed the formidable 10-day threshold for DWC by paring its number to just 9 days. By contrast, a more lumbering Source Interlink held 41 days of working capital as recently as 2005. Much of this improvement came from better receivables management; it cut DSO over the past two years to 20 from 49.

Source Interlink CFO Marc Fierman credits part of the improvement to an initiative that converts many customers from a traditional wholesaler/retailer relationship to a scan-based trading relationship. Under that model, retailers aren’t billed for an item and don’t pay for it until it sells at the retail level. That has the effect of boosting inventories for the wholesaler — in this case, Source Interlink — but from a working-capital perspective those increases are more than off set by a reduction in receivables. “Converting to scan-based trading also results in significant operational savings for both us and the retailer,” Fierman says, “as neither has to continue to perform the processes to hand off inventory at the store level.”


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