Nevertheless, some industries generate cash more quickly than others. If your customers are fast-paying supermarket chains, for instance, you don’t have to worry much about receivables, says Robert Cantwell, CFO of B&G Foods, a marketer of foods that have a long shelf life. Such quick bill payment from customers may have a domino effect, buttressing the ability of food producers to pay their bills on time.
And companies within high-performing industries often outperform their enviable industry averages. With few anxieties about accounts receivable, B&G was able to boost its cash efficiency by 247% and knock a day off its days payable outstanding between the third quarters of 2008 and 2009, according to the 2009 Credit Risk Benchmarking Report from CFO Financial Benchmarks, making it one of the most desirable credit risks in its category. The company filled its cash reserves by outsourcing about a third of its manufacturing, according to Cantwell.
Of course, companies in industries that perform less well can still pursue strategies to generate cash more effectively. Lodged within the sluggish metals and mining business, which saw its third-quarter cash generation sink by 8%, Brush Engineered Materials nonetheless scored a 375% rise in cash efficiency. Those improvements are “anything but accidental,” says CFO Grampa. “It’s something we actually sought to achieve, and expect of ourselves.”
Before Brush plunges into a market or takes on a major new customer, it assesses the fixed- and working-capital commitment needed. It then ranks the opportunities in terms of their long-term cash benefit to the company — and often opts for the ones that are most efficient.
On the other hand, companies can take advantage of the inefficiencies of a merger target to squeeze extra cash out of the revenue it acquires. “Often when we buy a company we have opportunities to take down its working capital,” says Fearon. “And that, of course, becomes a cash inflow to us.” Of the $1.6 billion of operating cash flow that Eaton recorded in 2009, about 50% came from reductions in working capital.
Once a company is integrated into a supply chain, the parent can cut costs by tying supply shipments more closely to the fluctuating needs of customers. TriMas, a packaging and machine-parts company, pores over historical order patterns for each of the company’s five business units. “As you understand customer demand,” CFO Mark Zeffiro observes, “you can then streamline your production, fulfillment, ordering, and ultimately your supply chain at large in terms of its shipment costs.”
Armed with such understanding, the manufacturer has been able to slim down its inventory. Sometimes that requires thinking outside the box — literally. On Chinese docks, for instance, workers pry open containers from many supply points and pack an assortment of as many as 10 different products into a single 40-foot box. That repackaging results in shipments that contain smaller volumes of more products, which “will more likely meet customer needs than ordering lots of the same things in each container,” Zeffiro says. “As a result, we don’t have such large stocks in our U.S. warehouses.”
David M. Katz is New York bureau chief for CFO.