How Low Can It Go? The 2006 Working Capital Survey

Forget the Float? The 2001 Working Capital Survey

In a tough operating environment, negative working capital isn't always a plus.

Ronald Fink
CFO Magazine

July 1, 2001

Working capital efficiency can be a beautiful thing, as any finance executive familiar with the Working Capital Survey conducted by CFO magazine and REL Consultancy Group should know by now. The idea, as we explained in our first survey four years ago, is straightforward enough. If you minimize your working capital — that is, the amount tied up in receivables, payables, and inventory — you maximize your cash flow. The freed cash can then be reinvested in the business, thereby enhancing your prospects for growth. This year's survey once again shows how companies stack up within their industries according to this measure of financial performance. Included are operating companies with at least $600 million in sales and a significant amount of receivables, payables, and inventory.

Acquiescence Required
The recent downturn in the economy calls into question the assumptions underlying a strategy of minimizing working capital. To the extent that it means reducing the number of days that sales (or receivables) are outstanding, increasing days that payables are outstanding, or both, the effort requires the acquiescence of customers and creditors, respectively.

And if either constituency doesn't go along, the idea can backfire. After all, dunning customers and stiff-arming suppliers — otherwise known as "playing the float" — may be easy enough to pull off during good times, but when the economy slows, those tactics may drive hard-pressed customers into the arms of more-lenient competitors, and scare suppliers into refusing to provide product on credit. To the extent that the strategy risks bringing about either of these unintended consequences, notes Adam Levy, an analyst for Epoch Partners, in San Francisco, "negative working capital can work against you."

This doesn't mean abandoning attempts at managing working capital aggressively. Just ask Amazon.com. Granted, investors now pore over the hugely unprofitable E-tailer's working capital trends to discern just how much leeway it has with suppliers. That, naturally enough, eliminates the possibility of mining cash from the company's payables, as Amazon CFO Warren Jenson is the first to admit. When describing how working capital figures into the company's shift in strategic emphasis from growth to profitability, Jenson notes: "This isn't about trying to string our vendors out."

However, a second route to increased cash flow from working capital that's plied by many companies — decreasing days of receivables outstanding — isn't available to Amazon either, simply because it operates more or less on a cash basis, as credit card payments are made within two days of customer orders. In short, the company has little, if any, room for improvement there.

That leaves inventory. Managing inventory more effectively, as reflected in increasing turnover, is now a key tactic in Amazon's search for black ink. "We have to manage our assets very carefully so that we aren't tying up investment dollars," says Jenson.

The effort is taking place on two fronts. For starters, Jenson says, the company is working with book publishers to provide just-in-time delivery, so that it holds inventory for shorter periods. And he asserts that Amazon has had good results here: "We've gotten much better at working with the publishers."

Second, Amazon is looking to outsource inventory management in new product areas when that makes sense. Consider the arrangement the company signed last year with Toys R Us. While Amazon fulfills all toy orders placed through its Internet site, Toys R Us is responsible for the inventory. Amazon plans to take the same approach with its newly announced foray into personal computers. "Fulfillment is where we add value," notes Jenson, though the company has also been trying to make its warehouse system more efficient.

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