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?

On the inventory front, Church & Dwight benefited from a reduction in the amount of safety stock that was being held, but also challenged managers to cut back on the number of SKUs the company was carrying and published monthly reports on the results. The company also began producing monthly reports on slow-moving and remnant inventory, by business unit, showing managers where they stood against their peers. Not surprisingly, the old stuff started to disappear. “Nobody wants to be at the bottom of the list,” Farrell observes. Especially when there’s a spotlight on the offenders.

A Model Improvement at Atlas Air

Dunning late-paying customers and making across-the-board inventory cuts can quickly reduce working capital, but the benefits aren’t always sustainable. Poor working-capital performance tends to be rooted in any number of operational inefficiencies that aren’t always amenable to superficial fixes — such as faulty goods or erroneous invoices that give customers reason to pay late, or forecasting miscalculations that lead to overstocked distribution centers, or processing glitches that cause bills to be paid before they’re due.

In short, sometimes it takes a complete overhaul of your business model to set things right.

Last year, Atlas Air Worldwide, a $1.6 billion air-freight company, began making changes to its business model that would simultaneously improve its working-capital performance and leave it less vulnerable to the ups and downs of the business cycle. Historically a lessor of freight aircraft through its Atlas Air subsidiary, the company in 2001 acquired Polar Air Cargo, which primarily operated as a scheduled-service carrier.

Polar Air was more susceptible to downturns in the business cycle, and last fall Atlas Air Worldwide shifted its focus to leasing, too. Under that business model, customers pay in advance for their use of the company’s planes and crews, which drives down the carrier’s outstanding receivables, and also pay for the jet fuel they use.

By minimizing the day-to-day risk of filling its planes or getting hammered by volatile fuel prices, says Atlas Air Worldwide senior vice president and CFO Jason Grant, the company has gained better visibility into its earnings and freed substantial amounts of cash from working capital. It is also attracting a generally more creditworthy clientele with the leasing model, which cuts credit risk and minimizes past-due accounts. The payoff? Last year, Atlas Air Worldwide reduced its days sales outstanding by 51%, driving a 46% reduction in days working capital.

Meanwhile, on the payables front, in 2007 Atlas installed new payment-processing software that allows its vendors to forgo paper invoices and file for payment electronically. The system routes the pertinent data directly to the people who need to see it, giving the company greater ability to take advantage of negotiated discounts for early payments. “Previously, we could have committed to paying sooner to a vendor, but it would have been tough for us to do it,” Grant says. “Anytime you’re taking in paper invoices and passing them around from desk to desk, it gets hard to accelerate the process. Now we know exactly where an invoice sits at any time and can act on it as quickly as we wish.”


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