Working It Out: The 2010 Working Capital Scorecard

The recession triggered a meltdown in working capital performance, but also inspired numerous efforts to improve. Will they last?

Having come through last year’s trial by fire, though, some companies may have forged lasting solutions to supply-chain problems. In the depths of the recession, for instance, Intel executives grew increasingly worried about whether financial distress at some smaller parts integrators and distributors would hurt their ability to pay. “So we started some working capital [financing] programs to actually help them survive the chaos,” says Smith.

The company invoked a tough triage process in which it helped only those businesses it thought would survive. “It created a bond of trust and loyalty with those companies that will pay big dividends in the future,” Smith predicts.

David M. Katz is New York bureau chief 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.

Weighted Working Capital

Current year net working capital – previous year net working capital multiplied by the year-to-year revenue change.

A decrease is an improvement, an increase a deterioration.

Working Capital Opportunity

Upper-quartile trade receivables, inventory, or accounts payable performance of sample – comparable performance of a company or industry.

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.

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