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.

Contrary to the theory that abundant cash leads to poor working capital performance, George sees the two spheres as completely separate. He says the incentive to streamline the company’s supply chain is driven by the demands of its customers for shorter lead times and flexible terms. “They want to say, ‘Look, I don’t want inventory until I need it, and I want you to be able to respond,’” says George. Ultimately, it boils down to the promise of future revenue, since Esterline’s major customers, which include Boeing and Airbus, want suppliers that can operate as leanly as possible.

Having a significant cash cushion has nothing to do with how hard the company works to turn around its inventory, says the finance chief: “Simply because we have cash on the balance sheet does not influence that focus at all.”

Give It to the Shareholders

Bob Daleo, CFO of Thomson Reuters, maintains that companies that fail to manage their working capital are doing a great disservice to their investors. “So because we have more cash, we’re going to let customers and vendors keep our cash longer? That’s dumb,” he says. “Instead of giving it to their vendors and customers, why don’t they give it back to their shareholders?”

Thomson Reuters, a $13 billion information, data, and news provider, has little inventory to cut. With 40% of its revenues coming from outside the United States, the company is also geographically locked in to a mix of longer bill-collection times. Thus, it devoted its efforts to making working capital improvements in the area over which it has the most control: payment terms. The effort yielded an increase in DPO from 12 in 2009 to 15 in 2010.

As part of its focus on improving its working capital performance, Thomson Reuters consolidated its payment process in India, using a centralized payment-processing team to implement standardized policies,” says Daleo.

In the current economic climate, however, the top line of the income statement appears to be a much higher priority than cash on the balance sheet. Yet while the focus on improving working capital performance may have dimmed, some companies are striving to sustain the gains they achieved during the recession.

Take Cytec Industries, for example. In the wake of the 2008 financial meltdown, Cytec, a $2.7 billion supplier of specialty chemicals and materials, was faced with debt and liquidity challenges. To make sure it had adequate cash on hand, the company embarked on a major effort to boost its working capital performance. As part of the push, Cytec curbed its past focus on net income and linked employee pay to the company’s working capital goals.

By the end of 2009, the company’s DWC dropped 27%, from 90 to 66. Although its revenues decreased 22% that year, it was able to offset the loss with the cash it had freed up by cutting working capital days. Spurred by the revival of the chemical industry in 2010, Cytec’s revenues rebounded by 13% that year. With its incentive-compensation programs in place, however, the company was able to cut its DWC even further, to 61 days. The decrease in DWC improvement from 27% in 2009 to 8% in 2010 may simply mean that the company had made the most of its existing opportunities in 2009, says Cytec CFO David Drillock.

Still, the reduction in working capital days has produced enough cash flow to enable the company to reinvest in itself as well as restore dividend payments and launch a share-buyback program. “It really doesn’t matter what industry you’re in — if you have strong cash flow, you’re generating value for shareholders,” says Drillock. But if sales pick up in a big way, it may be hard for other finance chiefs to follow suit.

David M. Katz is New York bureau chief and senior editor for accounting at CFO.

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