Cleaner (Balance) Sheets: The 2009 Working Capital Scorecard

Read the complete results of the 2009 working capital survey, or review just those results that appeared in print.

Plato called necessity the mother of invention. It may also be the mother of collection.

Squeezed by a slowing economy and nearly frozen credit markets, U.S. companies showed themselves surprisingly adept last year at freeing cash from the one remaining source at hand: their balance sheets. Ramping up collection efforts and paring down inventories, the 1,000 largest companies slashed days working capital (DWC) in 2008 by 6.4% — the best improvement on that front in at least five years, reports consulting firm REL, the Hackett Group division that compiled this 12^th annual edition of the CFO/REL Working Capital Scorecard. The result: a total of $62.7 billion liberated from working capital.

To be sure, the improvement may have been exaggerated by the unusual arc of the year's economic activity, especially on the collections front, where 80% of companies were able to reduce their days sales outstanding (DSO). While business conditions in the fourth quarter were a nightmare, the first three quarters were sufficiently strong that full-year revenue for the 1,000 companies in the REL universe actually rose 10.3%. When business activity cratered in the fourth quarter, it likely drove year-end receivables (the numerator in the DSO calculation) sharply lower, even as the divisor (average daily revenue for the year) remained high.

Still, it's easy to find companies that were able to reduce DSO even as revenues remained strong. Church & Dwight Co., the $2.4 billion maker of Arm & Hammer Baking Soda and other household products, cut DSO by 22% and DWC by 30%, even as its revenues grew from quarter to quarter. Cliffs Natural Resources, a $3.6 billion producer of iron ore and coal, cut DSO by 49% — and chopped DWC by 42% — while posting a year-over-year fourth-quarter revenue gain.

"We started focusing on the difficult economic environment very early in the fall," says Cliffs executive vice president and CFO Laurie Brlas. "Everybody in the company turned their attention to it, and made cash their front-and-center focus."

In fact, the improvements in working capital were broad and deep; 603 companies reduced DWC, as did more than three-quarters of the industry groups tracked by REL. The top-performing sectors: air freight and logistics, auto components, computers and peripherals, and metals and mining.

"It's good news that so many companies, caught in the cash crisis and credit crunch, finally recognized that they can secure a substantial amount of cash from working capital," observes Mark Tennant, president, Americas, for REL. "But this is just one year, and it will be interesting to see how it plays out in 2009."

A Mark of Quality
Certainly there remains room for improvement. REL calculates that if the companies in the bottom three quartiles of working-capital performance matched those in the top quartile, they could extract another $776 billion in cash from their balance sheets.

If that isn't sufficient argument for upgrading working-capital management, here's another: it improves not just cash flow, but also business in general. "Working-capital performance is a good indicator of discipline and process rigor within a company," says Matthew Farrell, executive vice president and CFO at Church & Dwight. "If you find it, chances are you'll also find quality processes in lots of other places, too — marketing, analytics, sales, planning, plant operations."

Indeed, the same systems and capabilities that enable strong working-capital performance also tend to foster strong performance in other areas: better forecasting of customer demand, a better ability to deliver goods and services on a timely basis, and better relationships with vendors. They can also drive cost savings in surprising corners of the enterprise. As it reduced the number of SKUs (stock-keeping units) it offers over the past two years, for example, Church & Dwight not only lowered inventory and warehousing costs but also saved on the cost of designing new packages and conducting legal reviews each time it created or changed a product label.

Tennant suspects that over the near term, larger and more-powerful companies with greater leverage over their supply chains will continue to improve their working-capital performance, perhaps by pushing more working capital onto the balance sheets of their smaller suppliers and, in some cases, their customers. But, he warns, such brute-force measures have limits; smaller companies typically have less ability to tap external sources of capital and can absorb only so much punishment. Longer term, he says, this opens the door for supply-chain financing to play a bigger role in driving working-capital performance. The idea is that financially strong buyers can leverage their superior credit ratings to help suppliers secure quick payment of invoices from intermediaries such as banks and other financial institutions.

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