Cleaner (Balance) Sheets: The 2009 Working Capital Scorecard

"We see people are finally getting the message" about working capital, says Tennant. "Now we want to make sure they continue to seize the opportunities that are out there." The CFO/REL Working Capital Scorecard recognizes the three companies in each of 20 industries that made the most of their opportunities in 2008. Here are the stories of two such companies: Church & Dwight and Atlas Air Worldwide Holdings.

Church & Dwight Shines the Light
"Sunshine," says Matthew Farrell, paraphrasing the late U.S. Supreme Court Justice Louis Brandeis, "is the great disinfectant. Shed light on something and good things happen."

Church & Dwight CFO Farrell has been shining a light on the company's working-capital management practices since his arrival in late 2006. With the endorsement of chairman and CEO Jim Craigie, free-cash-flow metrics, which include working capital as a critical component, now account for 25% of the formula that sets incentive compensation for Church & Dwight executives.

And good things are happening. Over the past two years, the company has lowered days working capital from 51 days to 34 days thanks to big reductions in days sales outstanding and days inventory outstanding. There's been no magic to it, Farrell says — no throwing extra manpower at the problem, no slick software deployed. To collect receivables internationally, for example, company executives simply began hosting monthly phone calls with general managers and finance executives stationed overseas to discuss their working-capital performance and highlight areas ripe for improvement. "It was purely a matter of making more of an effort," says Farrell.

On the inventory front, Church & Dwight benefited from a reduction in the amount of safety stock that was being held, but also challenged managers to cut back on the number of SKUs the company was carrying and published monthly reports on the results. The company also began producing monthly reports on slow-moving and remnant inventory, by business unit, showing managers where they stood against their peers. Not surprisingly, the old stuff started to disappear. "Nobody wants to be at the bottom of the list," Farrell observes. Especially when there's a spotlight on the offenders.

A Model Improvement at Atlas Air
Dunning late-paying customers and making across-the-board inventory cuts can quickly reduce working capital, but the benefits aren't always sustainable. Poor working-capital performance tends to be rooted in any number of operational inefficiencies that aren't always amenable to superficial fixes — such as faulty goods or erroneous invoices that give customers reason to pay late, or forecasting miscalculations that lead to overstocked distribution centers, or processing glitches that cause bills to be paid before they're due.

In short, sometimes it takes a complete overhaul of your business model to set things right.

Last year, Atlas Air Worldwide, a $1.6 billion air-freight company, began making changes to its business model that would simultaneously improve its working-capital performance and leave it less vulnerable to the ups and downs of the business cycle. Historically a lessor of freight aircraft through its Atlas Air subsidiary, the company in 2001 acquired Polar Air Cargo, which primarily operated as a scheduled-service carrier.

Polar Air was more susceptible to downturns in the business cycle, and last fall Atlas Air Worldwide shifted its focus to leasing, too. Under that business model, customers pay in advance for their use of the company's planes and crews, which drives down the carrier's outstanding receivables, and also pay for the jet fuel they use.

By minimizing the day-to-day risk of filling its planes or getting hammered by volatile fuel prices, says Atlas Air Worldwide senior vice president and CFO Jason Grant, the company has gained better visibility into its earnings and freed substantial amounts of cash from working capital. It is also attracting a generally more creditworthy clientele with the leasing model, which cuts credit risk and minimizes past-due accounts. The payoff? Last year, Atlas Air Worldwide reduced its days sales outstanding by 51%, driving a 46% reduction in days working capital.

Meanwhile, on the payables front, in 2007 Atlas installed new payment-processing software that allows its vendors to forgo paper invoices and file for payment electronically. The system routes the pertinent data directly to the people who need to see it, giving the company greater ability to take advantage of negotiated discounts for early payments. "Previously, we could have committed to paying sooner to a vendor, but it would have been tough for us to do it," Grant says. "Anytime you're taking in paper invoices and passing them around from desk to desk, it gets hard to accelerate the process. Now we know exactly where an invoice sits at any time and can act on it as quickly as we wish."

In addition to making it easier to prepay, Grant says, the new system has allowed Atlas to reduce the number of people devoted to accounts payable by more than a third. So, while prepaying invoices isn't conserving cash, earning prepayment discounts and reducing payroll certainly are. Taken together, the structural changes Atlas Air Worldwide has made to its business model hold the promise of lasting improvement in its working-capital performance.

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