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Barely Working: The 2003 Working Capital Survey

Companies squeezed more cash from their businesses this year -- but not much. Was it the economy, or too much focus on Sarbanes-Oxley compliance?

Maybe they were preoccupied with governance issues. But whatever the reason, U.S. companies blew some good chances last year to generate extra cash via working capital improvements. That’s the primary conclusion of CFO’s annual CFO’s annual working capital survey, conducted by REL Consultancy Group.

The survey, which examines the 1,000 largest U.S. companies, showed the average company improved its days working capital (DWC) by a meager 2.1 percent. That’s a poor showing compared with previous years — for 2001 the improvement was 9 percent. It’s also just a fraction of the 7.6 percent improvement recorded by European companies.

“This is surprising,” says REL CEO Stephen Payne. “And it’s a missed opportunity, since companies with strong and consistent cash flows are rewarded with favor in the eyes of the analyst community.”

Clearly, cash was a concern in 2002, as U.S. companies reacted to economic woes by slashing capital expenditures by nearly 13 percent. With the economy sputtering and factory utilization rates running at a low 75 percent, such cutbacks are justified in the short term, says Payne. “But in the long term, that trend will have to be reversed to protect future earnings and cash flows.” Working capital improvements, by contrast, can be maintained even after the economy improves.

Discounting a Discount

Of course, the poor economy is also reflected in the poor corporate results. Days of inventory were cut, on average, by only 2.1 percent — a rate almost certainly affected by sluggish sales. “If sales are flat, it’s tough to increase the rate of inventory turnover,” observes Payne. Meanwhile, days sales outstanding (DSO) deteriorated by 0.8 percent, suggesting that companies were having trouble collecting their receivables.

That’s not surprising, given that the greatest improvement — 3 percent — was for days payable outstanding (DPO). That’s evidence that companies are holding on to payments longer. “It’s the easiest thing to fix because you directly control it,” notes Rob Zimmerman, treasurer of Greif Inc., a Delaware, Ohio-based global industrial-packaging firm.

Zimmerman, who manages a working capital project as part of a companywide performance-improvement effort, expects to significantly increase Greif’s DPO by overhauling the payment terms it currently has with its vendors, as well as by educating Greif’s purchasing managers to look beyond operating profit when negotiating with suppliers.

Even with interest rates at all-time lows, he explains, discounts for prompt payment don’t always mean savings. “I’m sure our suppliers love us because we pay very quickly,” he says. “But with certain large suppliers, it doesn’t make economic sense to take the discount, given our current cost of funds.” Greif’s own customers also are demanding longer terms, he says, making it equally important to educate the sales force about the impact on DSO.

While the working capital performance average for all U.S. companies left much to be desired, some sectors showed notable improvements in DWC, including aerospace and defense (a 14 percent improvement, in large part the result of days inventory outstanding reductions of 28 percent), auto parts (8 percent), and computer-related hardware (5 percent). The communications-technology sector posted an impressive 20 percent average DWC improvement, thanks to longtime working capital stars 3Com and Cisco, as well as notable improvements by troubled firms including Qualcomm and Lucent.


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