Cleaner (Balance) Sheets: The 2009 Working Capital Scorecard

Hard times have inspired companies to wring lots of cash out of working capital. How much better can they get?

Read the

complete results

of the 2009 working capital survey, or review just those

results that appeared in print.

Plato called necessity the mother of invention. It may also be the mother of collection.

Squeezed by a slowing economy and nearly frozen credit markets, U.S. companies showed themselves surprisingly adept last year at freeing cash from the one remaining source at hand: their balance sheets. Ramping up collection efforts and paring down inventories, the 1,000 largest companies slashed days working capital (DWC) in 2008 by 6.4% — the best improvement on that front in at least five years, reports consulting firm REL, the Hackett Group division that compiled this 12th annual edition of the CFO/REL Working Capital Scorecard. The result: a total of $62.7 billion liberated from working capital.

To be sure, the improvement may have been exaggerated by the unusual arc of the year’s economic activity, especially on the collections front, where 80% of companies were able to reduce their days sales outstanding (DSO). While business conditions in the fourth quarter were a nightmare, the first three quarters were sufficiently strong that full-year revenue for the 1,000 companies in the REL universe actually rose 10.3%. When business activity cratered in the fourth quarter, it likely drove year-end receivables (the numerator in the DSO calculation) sharply lower, even as the divisor (average daily revenue for the year) remained high.

Still, it’s easy to find companies that were able to reduce DSO even as revenues remained strong. Church & Dwight Co., the $2.4 billion maker of Arm & Hammer Baking Soda and other household products, cut DSO by 22% and DWC by 30%, even as its revenues grew from quarter to quarter. Cliffs Natural Resources, a $3.6 billion producer of iron ore and coal, cut DSO by 49% — and chopped DWC by 42% — while posting a year-over-year fourth-quarter revenue gain.

“We started focusing on the difficult economic environment very early in the fall,” says Cliffs executive vice president and CFO Laurie Brlas. “Everybody in the company turned their attention to it, and made cash their front-and-center focus.”

In fact, the improvements in working capital were broad and deep; 603 companies reduced DWC, as did more than three-quarters of the industry groups tracked by REL. The top-performing sectors: air freight and logistics, auto components, computers and peripherals, and metals and mining.

“It’s good news that so many companies, caught in the cash crisis and credit crunch, finally recognized that they can secure a substantial amount of cash from working capital,” observes Mark Tennant, president, Americas, for REL. “But this is just one year, and it will be interesting to see how it plays out in 2009.”

A Mark of Quality

Certainly there remains room for improvement. REL calculates that if the companies in the bottom three quartiles of working-capital performance matched those in the top quartile, they could extract another $776 billion in cash from their balance sheets.


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