Easing the Squeeze: The 2011 Working Capital Scorecard

As sales revive and coffers swell, companies seem less intent on wringing cash out of working capital.

An abridged version of the 2011 CFO/REL Working Capital Scorecard can be found here.

For months after the Great Recession officially ended in June 2009, the need for cash trumped all else. With credit still scarce, companies continued to squeeze cash out of their supply chains. Finance chiefs led the charge to tighten bill collection, loosen their own payment terms, and dump inventory.

Today, cash is no longer a problem, as corporate coffers are filled to the brim. But don’t be too quick to credit working capital improvement. The 2% decrease in days working capital (DWC) last year qualifies as downright modest, some say, although it is certainly an improvement, given that DWC increased 9.9% the prior year, the worst performance in half a decade. (Remember that a decrease in DWC represents improved working capital performance.)

Many CFOs disavow any connection between companies’ strong cash positions and an apparent lack of emphasis on working capital. How strong? One thousand of the biggest publicly reporting nonfinancial companies registered an 11.5% jump in revenue last year, according to the 2011 CFO/REL Working Capital Scorecard. (By comparison, revenue dropped by 12.1% in 2009.)

Mixed Signals

All three components of DWC showed similarly scant levels of improvement. Days sales outstanding (DSO) declined 0.1%, while days inventory outstanding (DIO) and days payable outstanding (DPO) each improved just 1.1%.

To some experts, such sluggishness bespeaks complacency born of abundant cash. “The energy and focus have now been placed much more on the [profit-and-loss] statement,” says Mark Tennant, a principal with REL, a working capital consulting firm. “There isn’t a continuous focus on cash flow and working capital.”

If, indeed, bulging coffers are to blame for a new spirit of complacency, the result could be a false sense of security. Corporate balance sheets may not be nearly as impervious as they seem, says Stephen Payne, Americas leader of working capital advisory services at Ernst & Young. Despite an impressive recent comeback in corporate productivity, high unemployment continues to plague the economy, he explains.

To produce sustainable growth, companies will “have to hire people and invest via capex, and that’s going to start depleting their cash hoards,” says Payne. (However, few companies seem poised to do that — see “Treading Water.”) In the case of U.S.-based multinationals, much of that cash is sequestered abroad and more or less unavailable domestically, thanks to the 35% tax on repatriated profits.

Nevertheless, the stress that led many companies to try to wring cash from working capital during the recession has been eased by some signs that consumer demand is beginning to rebound. If sales forecasts continue to improve, corporations are bound to put more resources into driving revenue than into process improvements.

At The Kroger Co., which recently celebrated its 29th straight quarter of growth in food sales, for example, there’s little doubt where its priorities lie. Acknowledging that he sees an opportunity to derive as much as $600 million in cash via working capital improvements at the $82 billion (in revenues) supermarket chain, finance chief Mike Schlotman says he would only go about it gingerly. “As the CFO, I could easily get it out and say I’ve got a few hundred million dollars of cash,” he says. “But if it hurts sales, that’s not such a great accomplishment.”


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