Faced with cash calls from their banks and creditors in the wake of the financial meltdown, many companies sought to squeeze funds out of their working capital. They did so by going after customers who owed them money, cutting down on the costs associated with inventory, and increasing their days payable outstanding.
The result is that many corporate coffers are filled to bursting with cash. To some experts, that abundance has led to a certain complacency about making improvements in working capital. In 2010, following the worst year in recent memory in terms of working capital performance, nonfinancial companies merely treaded water. The three components of days working capital showed similarly sluggish 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%, according to the 2011 CFO/REL Working Capital Scorecard. (For full coverage of the scorecard’s results, see the upcoming July/August issue of CFO magazine.)
Still, there are indications that many companies are looking to better those results. With much of the low-hanging fruit of working capital improvements already picked in the wake of the financial meltdown, a good area to look for betterment is on the payment side, says Steve Riordan, global managing director of advisory services at PRGX, a working capital consultancy.
Often overlooked because of the relatively low status of accounts payable in finance departments, A/P thus provides an opportunity for process and structural improvements that can enable companies to hold on to their cash longer. For companies looking to improve their DPO scores, Riordan recommends the following:
1. Let A/P chiefs drive A/P improvements. Companies composed of many divisions often put finance and accounting shared-services groups together to support all those units. When it comes to working capital improvements, a subgroup consisting of executives from purchasing, treasury, and payables often will run the show.
The problem at many companies, however, is that while people from all three functions are responsible for the project, “it’s not clear who’s ultimately accountable for improving working capital,” says Riordan.
When it comes to projects aimed at improving payment terms, though, it’s clear who should be in charge: the A/P director, who often reports to the controller. Sitting on mountains of data about externals (how fast vendors are being paid by the entire market and on what terms) and internals (the kind of job purchasing managers are doing in managing payables), the A/P chief is in the best spot to see where improvements need to be made.
2. CFOs or chief procurement officers should sponsor the effort. While they don’t have the time to take the day-to-day lead, executives who directly report to chief executive officers should take responsibility and “own the business case” for the project. In particular, the finance or procurement chief should be committed — and drive the company’s commitment — to a particular return on investment.