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.

Striking success stories at MEMC, Terra, and Source Interlink were exceptions in 2007, when the largest U.S. companies (excluding automakers) generally recorded only marginal improvement in DWC, down to 38.2 days from 38.4 a year earlier. But that slight improvement outpaced Europe’s largest public companies (also excluding automakers), whose DWC climbed to 47.3 days from 46.8 the prior year.

A prolonged recession may tempt managers to take their eyes off short-term working-capital goals, but managers who stray for long face perilous consequences. Slack working-capital performance may not decide a company’s fate from one quarter to the next, but in the long run it will certainly dull the competitive edge.

Randy Myers is a contributing editor of CFO.

How Working Capital Works

Days Sales Outstanding: AR/(total revenue/365)

Year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by one day of average revenue.

A decrease in DSO represents an improvement, an increase a deterioration. In the accompanying charts, companies marked with an asterisk have securitized receivables, which improve DSO through financing alternatives without improving the underlying customer-to-cash processes such as credit-risk assessment, billing, collections, and dispute management. The scorecard eliminates this distortion by adding securitized receivables back on the balance sheet before calculating DSO.

Days Inventory Outstanding: Inventory/(total revenue/365)

Year-end inventory divided by one day of average revenue.

A decrease is an improvement, an increase a deterioration.

Days Payables Outstanding: AP/(total revenue/365)

Year-end trade payables divided by one day of average revenue.

An increase in DPO is an improvement, a decrease a deterioration. For purposes of the survey, payables exclude accrued expenses.

Days Working Capital: (AR + inventory – AP)/(total revenue/365)

Year-end net working capital (trade receivables plus inventory, minus AP) divided by one day of average revenue.

The lower the number of days, the better. The percentage change is marked N/M (not meaningful) if DWC moved from a positive to a negative number or vice versa.

Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DIO. Our methodology, however, uses net sales across the four working-capital categories to allow a balanced comparison.

This year’s survey uses the Global Industry Classification Standard to categorize companies.

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