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?

If that isn’t sufficient argument for upgrading working-capital management, here’s another: it improves not just cash flow, but also business in general. “Working-capital performance is a good indicator of discipline and process rigor within a company,” says Matthew Farrell, executive vice president and CFO at Church & Dwight. “If you find it, chances are you’ll also find quality processes in lots of other places, too — marketing, analytics, sales, planning, plant operations.”

Indeed, the same systems and capabilities that enable strong working-capital performance also tend to foster strong performance in other areas: better forecasting of customer demand, a better ability to deliver goods and services on a timely basis, and better relationships with vendors. They can also drive cost savings in surprising corners of the enterprise. As it reduced the number of SKUs (stock-keeping units) it offers over the past two years, for example, Church & Dwight not only lowered inventory and warehousing costs but also saved on the cost of designing new packages and conducting legal reviews each time it created or changed a product label.

Tennant suspects that over the near term, larger and more-powerful companies with greater leverage over their supply chains will continue to improve their working-capital performance, perhaps by pushing more working capital onto the balance sheets of their smaller suppliers and, in some cases, their customers. But, he warns, such brute-force measures have limits; smaller companies typically have less ability to tap external sources of capital and can absorb only so much punishment. Longer term, he says, this opens the door for supply-chain financing to play a bigger role in driving working-capital performance. The idea is that financially strong buyers can leverage their superior credit ratings to help suppliers secure quick payment of invoices from intermediaries such as banks and other financial institutions.

“We see people are finally getting the message” about working capital, says Tennant. “Now we want to make sure they continue to seize the opportunities that are out there.” The CFO/REL Working Capital Scorecard recognizes the three companies in each of 20 industries that made the most of their opportunities in 2008. Here are the stories of two such companies: Church & Dwight and Atlas Air Worldwide Holdings.

Church & Dwight Shines the Light

“Sunshine,” says Matthew Farrell, paraphrasing the late U.S. Supreme Court Justice Louis Brandeis, “is the great disinfectant. Shed light on something and good things happen.”

Church & Dwight CFO Farrell has been shining a light on the company’s working-capital management practices since his arrival in late 2006. With the endorsement of chairman and CEO Jim Craigie, free-cash-flow metrics, which include working capital as a critical component, now account for 25% of the formula that sets incentive compensation for Church & Dwight executives.

And good things are happening. Over the past two years, the company has lowered days working capital from 51 days to 34 days thanks to big reductions in days sales outstanding and days inventory outstanding. There’s been no magic to it, Farrell says — no throwing extra manpower at the problem, no slick software deployed. To collect receivables internationally, for example, company executives simply began hosting monthly phone calls with general managers and finance executives stationed overseas to discuss their working-capital performance and highlight areas ripe for improvement. “It was purely a matter of making more of an effort,” says Farrell.


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