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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?

DSO: Days Sales Outstanding = AR / (net sales / 365)
Year-end trade receivables net of allowance for doubtful accounts (plus financial receivables) divided by net sales per day.

A negative change in DSO represents an improvement. Poor DSO performance may signal weakness in the customer-to-cash (C2C) processes: sales, sales-order processing, and credit and collections management. But other factors can affect DSO, as when companies use payment terms as a sales incentive. While costly, this can be useful — as long as the finance department is aware of the strategy. Likewise, international sales can hurt DSO, thanks to long payment terms in some countries (terms in excess of 100 days are common in Italy, for example).

Securitization of receivables — a popular financing technique — positively affects DSO by moving receivables off the books. As a result, companies with first-time securitizations often showed dramatic DSO improvement in past surveys. As a strategy for improving working capital, it doesn’t reflect improved management of C2C processes. This year’s survey eliminates distortions by adding back off-balance-sheet receivables (indicated by an asterisk in the tables).

DIO: Days Inventory Outstanding = Inventory / (net sales / 365)
Year-end inventories, divided by sales per day.

A negative change in DIO is an improvement. Poor DIO performance suggests weakness in the forecast-to-fulfillment (F2F) processes (inbound supply chain, manufacturing, and the outbound supply chain). However, strategic decisions also cause inventory to vary. For example, a company with a single distribution center may optimize inventory, but take three days to deliver product to customers. A firm with multiple distribution centers may deliver faster, but it must keep more inventory on hand. Companies with offshore manufacturing often save on labor costs, but see inventory increases because of long shipping lead times.

DPO: Days Payable Outstanding = AP / (net sales / 365)
Year-end trade payables, divided by sales per day.

A positive change in DPO is an improvement. It improves working capital and increases cash on hand, but must be weighed against the possibility of discounts for prompt payment. Poor performance in DPO is often a sign of weakness in the procure-to-pay (P2P) processes, which include supplier management, procurement, and payables. For purposes of the survey, payables exclude accrued expenses.

DWC: Days Working Capital = (AR inventory – AP) / (net sales / 365)
Year-end net working capital (trade receivables, plus inventory, minus accounts payable) divided by sales per day.

The lower the number of DWC, the better. Poor DWC is a sign of poor management of DPO, DSO, DIO, or some combination of the three. In the tables, DWC changes marked by N/M, for not meaningful, have moved from a positive to a negative number or a negative to a positive number.

When DWC is negative (indicating that DPO is greater than the sum of DSO and DIO), a positive percentage change in DWC is actually an improvement. In the tables, we’ve attempted to clarify these instances by adding (i), for improvement of DWC, and (d), for deterioration of DWC, where appropriate.

How It’s Done

CFO’s annual working capital survey, conducted by REL Consultancy Group, was completely revised this year. Companies are benchmarked in their sectors based on DSO, DPO, and DIO. Then companies are given a DWC Quartile Rank (an overall days working capital ranking on a net basis). For each sector, the tables shows the largest two companies (by sales) in each quartile.

REL calculates working capital performance based on financial statements through the most recent 12 months. Data is adjusted to provide comparable figures. Reported sales have been adjusted when possible to account for acquisitions and disposals. Average DSO, DIO, DPO, and DWC for each sector are calculated on a weighted basis by sales.

Return on capital employed (ROCE) compares operating profit with total capital employed. Capital employed (CE) is the sum of total equity and gross financial debt.

See the 2003 Working Capital tables

To ask questions about REL Consultancy Group’s methodology, or to benchmark your own company using the REL methodology, visit www.relconsult.com.


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