An abridged version of the 2011 CFO/REL Working Capital Scorecard can be found here.

For months after the Great Recession officially ended in June 2009, the need for cash trumped all else. With credit still scarce, companies continued to squeeze cash out of their supply chains. Finance chiefs led the charge to tighten bill collection, loosen their own payment terms, and dump inventory.

Today, cash is no longer a problem, as corporate coffers are filled to the brim. But don't be too quick to credit working capital improvement. The 2% decrease in days working capital (DWC) last year qualifies as downright modest, some say, although it is certainly an improvement, given that DWC increased 9.9% the prior year, the worst performance in half a decade. (Remember that a decrease in DWC represents improved working capital performance.)

Many CFOs disavow any connection between companies' strong cash positions and an apparent lack of emphasis on working capital. How strong? One thousand of the biggest publicly reporting nonfinancial companies registered an 11.5% jump in revenue last year, according to the 2011 CFO/REL Working Capital Scorecard. (By comparison, revenue dropped by 12.1% in 2009.)

Mixed Signals
All three components of DWC showed similarly scant levels of improvement. Days sales outstanding (DSO) declined 0.1%, while days inventory outstanding (DIO) and days payable outstanding (DPO) each improved just 1.1%.

To some experts, such sluggishness bespeaks complacency born of abundant cash. "The energy and focus have now been placed much more on the [profit-and-loss] statement," says Mark Tennant, a principal with REL, a working capital consulting firm. "There isn't a continuous focus on cash flow and working capital."

If, indeed, bulging coffers are to blame for a new spirit of complacency, the result could be a false sense of security. Corporate balance sheets may not be nearly as impervious as they seem, says Stephen Payne, Americas leader of working capital advisory services at Ernst & Young. Despite an impressive recent comeback in corporate productivity, high unemployment continues to plague the economy, he explains.

To produce sustainable growth, companies will "have to hire people and invest via capex, and that's going to start depleting their cash hoards," says Payne. (However, few companies seem poised to do that — see "Treading Water.") In the case of U.S.-based multinationals, much of that cash is sequestered abroad and more or less unavailable domestically, thanks to the 35% tax on repatriated profits.

Nevertheless, the stress that led many companies to try to wring cash from working capital during the recession has been eased by some signs that consumer demand is beginning to rebound. If sales forecasts continue to improve, corporations are bound to put more resources into driving revenue than into process improvements.

At The Kroger Co., which recently celebrated its 29^th straight quarter of growth in food sales, for example, there's little doubt where its priorities lie. Acknowledging that he sees an opportunity to derive as much as $600 million in cash via working capital improvements at the $82 billion (in revenues) supermarket chain, finance chief Mike Schlotman says he would only go about it gingerly. "As the CFO, I could easily get it out and say I've got a few hundred million dollars of cash," he says. "But if it hurts sales, that's not such a great accomplishment."

Industrial Strengths — or Weaknesses
A major determinant (some might say limitation) of how a company regards the relationship between revenue and working capital hinges on its particular industry. There are severe curbs on how much cash a company like Integra LifeSciences Holdings can generate by slimming down its supply chain, demanding payment on time from its customers, or taking longer to pay its suppliers, for instance. Because of that, working capital improvements take a back seat to efforts to boost sales, according to Integra CFO John Henneman.

There's very little excess to trim in the supply line for the surgical implants and other time-sensitive orthopedic products that are Integra's specialties. "An awful lot of inventory is either held by sales reps — so they can be ready for surgery on very short notice — or held in hospitals for the same reason on consignment," Henneman says. "That requires quite a lot more inventory than you would need if you were in a business that had longer lead times."

Further, the $732 million company is caught in a receivables/payables squeeze: its hospital customers insist on longer payment terms than Integra can get from its own suppliers. "There's really nothing you can do about that if you want to play in the market, because other medical-device companies will take your business [otherwise]," he says.

On the other hand, the company must buy parts like screws or plates in such small quantities that it carries little clout with its vendors in negotiations on payment terms. Further, it must overbuy its inventory to have the right parts for any eventuality, even though most patients fall into a narrow range of possible needs.

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