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?

In addition to making it easier to prepay, Grant says, the new system has allowed Atlas to reduce the number of people devoted to accounts payable by more than a third. So, while prepaying invoices isn’t conserving cash, earning prepayment discounts and reducing payroll certainly are. Taken together, the structural changes Atlas Air Worldwide has made to its business model hold the promise of lasting improvement in its working-capital performance.

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.

Discuss

Your email address will not be published. Required fields are marked *