VideoThat helps explain why negative working capital, while perhaps a current fact of life for Amazon, is not a goal, except "over time," as Jenson puts it. It also suggests that other companies may have to be sufficiently profitable to win the confidence of their suppliers before they can manage working capital aggressively enough to become more profitable still.
For a look at companies best able to squeeze cash flow out of working capital, see the tables that begin below.
Ronald Fink is a deputy editor at CFO.
When Push Comes to Shove
The temptation to delay payments to suppliers may be especially hard to resist during an economic downturn, says Stephen Payne, president of REL Consultancy Group. "The short-term, knee-jerk reaction is to take as long as you can to pay," he points out.
But, Payne warns, that approach "can bite you in the rear end." He explains that when you next order product, suppliers treated in this fashion may simply increase their prices to "offset the abuse." After all, while the tactic decreases your days of payables outstanding, it increases your suppliers' days of receivables outstanding.
To be sure, he notes, "the whole idea behind supply-chain improvement is to get somebody else to carry the can." But buyers can manage that only if they're in a stronger position than their suppliers. "It all depends on your clout," says Payne.
Still, "if you want a genuine partnership," he adds, "it may be worth it to carry that debt." How to weigh the trade-offs involved? Much depends on whether you're focusing on top-line growth or profitability. For that reason, says Payne, companies that are new or trying to gain market share should be less draconian with suppliers, while those focusing on the bottom line may be better off taking a firmer approach. —R.F.
Behind the Rankings
The management of working capital combines two measures, weighted equally:
1. Days of Working Capital (DWC) = (Receivables + Inventory Payables) ÷ (Sales ÷ 365 Days). If payables exceed the sum of receivables and inventory, DWC is negative.
2. Cash Conversion Efficiency (CCE) = Cash Flow from Operations ÷ Sales.
The overall ranking: (Highest Overall CCE Company CCE) ÷ (Highest Overall CCE Lowest Overall CCE) + (Lowest Overall DWC Company DWC) ÷ (Lowest Overall DWC Highest Overall DWC). Days of Sales Outstanding (DSO), Inventory Turns, and Days of Payables Outstanding (DPO) are not part of the overall ranking criteria. Industry averages consider all companies in an industry, not just the top five.
Sources: REL Consultancy Group, Piranha Web
2001 Working Capital Survey Charts
Click on an industry to view the companies best able to squeeze cash flow out of working capital.
- Aerospace
- Automobiles
- Chemicals
- Coal
- Conglomerates
- Construction & Materials
- Containers & Packaging
- Cosmetics
- Electric Utilities
- Entertainment & Leisure
- Fixed-Line Communications
- Food & Beverage
- Food Retailers & Wholesalers
- Forest Products & Paper
- Gas Utilities
- General Industrial Services
- Health-Care Providers
- Home Construction & Furnishings
- Household Products
- Industrial Diversified
- Industrial Equipment
- Industrial Transportation
- Media
- Medical Products
- Mining & Metals
- Oil & Gas
- Pharmaceuticals & Biotech
- Retail
- Technology, Hardware & Equipment
- Textiles & Apparel
- Tobacco
- Transportation Equipment
- Travel
- Wireless Communications
Reader Comments» Post a comment