The Big Squeeze

With debt and equity markets closing for business, it's now time for CFOs to look closer to home for capital.

Throughout the year-long campaign, the “grisly details” of the ten largest disputes — some worth as much as €3 million — were published as standard items in monthly management reports, along with other working capital indicators. They also became regular points of discussion at executive board meetings. Henderson says that relentless focus was essential in “persuading people that we were deadly serious about reducing our working capital.”

Plastics Surgery

A similar story has unfolded at Borealis, the €3.7 billion Danish plastics producer. The success of its two-year-old working capital management program was based on “a direct appeal to professional pride,” making the performance of individual sales managers more transparent to other parts of the organization, says CFO Clive Watson, who arrived at the firm in November 2001 just as it embarked on a debt-reduction drive.

When Watson began analyzing the aging patterns of receivables a few weeks after joining from Thorn Lighting, a €600 million division of Austrian lighting firm Zumtobel, he found that Borealis’s problems were largely internal — in a nutshell, sales managers were cutting their own deals with customers, granting some of them longer periods than others to pay their bills. At the end of 2001, DSO (days sales outstanding) stood at 58 days, of which 17 were DOO (days overdue outstanding, or unpaid invoices).

What Watson wanted to avoid was ordering an across-the-board squeeze on customers or encouraging earlier payment through bigger rebates. “It’s very easy to reduce DSO by trading cash for profit, but that’s like getting on heroin — once you start it’s very difficult to get off,” he says.

His approach was a subtler one. He began by circulating a Powerpoint presentation around Borealis’s sales teams every month. This contained slides charting DSO and DOO performance for all eight business units (BUs), measured against figures for 2001 and targets for 2002. The presentation was accompanied by a hefty Excel file with 11 sections that showed, among other things, the largest overdue customers (that is, those with outstanding bills of €50,000 or more) by BU — and the name of the sales manager overseeing the account. Details of changes of payment terms and conditions on invoices by BU and sales manager were also included. “These files gave everyone a clear overview of the root causes of DSO build-up,” says Watson. “You could literally see, table by table, which sales managers were contributing the most to the credit losses, and who was doing the best in terms of DSO.”

At the same time, Watson set the wheels in motion to change the bonus schemes of sales managers, introducing new targets based on DSO and DOO reduction. Individual schemes vary, but generally, the emphasis has shifted from volume- or profit-related targets to cash-collection targets. “Everyone’s become far more conscious of [cash], so that when you go out and sell, you go out and collect bills as well,” he says. After all, “a sale is a gift until the cash is collected.”

Watson’s combination of analysis and incentives held the key to driving down DSO from 58 days to 48 days last year, and days overdue from 17 to 4. The firm also took out some 50,000 tons of inventory, reducing DIO from 48 days to 38 days. (See ” Material Whirl: Vendor-Managed Inventory” at the end of this article.)

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