Driving Cash Generation
Other companies were keen to shore up cash during the downturn by improving working capital even if they lacked relevant metrics or compensation schemes. No operating manager at Thomson Reuters, for instance, gets a bonus for hitting DSO or DPO targets. “But part of our short-term incentive plan is free cash flow. And improving cash collections and [accounts payable] is a great way to drive cash generation,” says Robert Daleo, the company’s CFO. “For us, one day of sales is around $8 million, so if you improve 10 days you’ve got 80 million bucks.”
Because the company’s top executives knew 2009 would prove an economic slog, they homed in on bill collection to avoid widespread DSO deterioration. The company also acted quickly on aging accounts to prevent collection problems. In terms of DPO, Thomson Reuters centralized its accounts-payable operations, a project that sacrificed a near-term gain in favor of a more sustainable working capital improvement. “What hurt us is that we got better at paying, and it actually shortened our DPO,” Daleo says. “But we also consolidated all of our vendor agreements and got much better terms.”
Like Thomson Reuters, Hughes Communications is also focused on long-term business goals rather than short-term survival. The provider of high-speed satellite Internet hookups wants to put a second satellite in the sky in the first half of 2012, an effort that will cost $400 million.
“The more we can finance that from internally generated funds, the better our business model will be going forward,” says CFO Grant Barber. Therefore, the quicker the company can turn inventory, the more cash will be available to meet the payments. On the flip side, Barber adds, “if cash gets tied up as inventory…you run the risk of obsolescence, as the latest technology keeps refreshing.”
Driven by such concerns, Hughes was able to slash its working capital days from 62 in 2008 to 36 in 2009. The company garnered a big piece of that by moving to credit-card payments from its individual customers. That “speeds up the payment, rather than [mailing a customer] an invoice and waiting for a check to come back in,” says Barber. On business-to-business accounts, the company focused on getting shorter payment terms up front in its contracts, moving its net standard terms from what used to be 45–60 days to 30 days.
Still, if the economy improves and growth starts to kick in, even the most successful companies will have a hard time holding on to the working capital performance levels they achieved in 2009. Indeed, the anemic working capital performance turned in by U.S. companies in 2006 and 2007 may have been due in part to the swelling credit bubble. When cash is cheap and easy to obtain, companies often lose the incentive to find it in their own operations. A growing economy can also make it tough for CFOs to hold the line on working capital elements such as inventory and receivables.
Allergan’s Edwards acknowledges, for example, that the firm will not match the cuts in inventory it recorded in 2009. “We can’t take this much inventory out of the channel every year,” he says. “You get to a point where you believe you’ve found the fine line between sufficient and insufficient inventory to meet end-user requirements.”