Video"A lot of our performance in this area is driven by the fact that we have large accruals for payroll and benefit-related costs, such as health and welfare plans and medical accounts, as well as for purchases of long-lived assets," says BNSF senior vice president, CFO, and treasurer Tom Hund. "So like a lot of companies in this industry, we end up with very low or negative working capital. But what gets us deeply into the negative is what we've done with receivables."
For starters, the company makes it a practice to factor its receivables, anathema to some firms. But, says Hund, "the financing terms we receive on secured receivables are really quite good. As an alternative to commercial paper, it works a little bit in our favor, and as an alternative to long-term debt, it is quite favorable."
More important, the company has made the efficient collection of receivables a priority since struggling with it following the 1995 merger of Burlington Northern Inc. and Santa Fe Pacific Corp. that created Burlington Northern Santa Fe. At the time, bills were taking too long to get sent to customers, weren't always correct, and were often paid late. "We split receivables into two worlds, one of which we referred to as days-to-bill, the other as days-to-pay," Hund recalls. "On the days-to-bill side, we found that a lot of the problems centered on the timeliness and integrity of our data, so we addressed that with technology initiatives designed to eliminate errors and to get much of the billing process out of human hands."
Progress was phenomenal. During the company's worst period, in late 1997 and early 1998, it had about 50,000 bills on hand on any given day that were not rated and therefore not rendered to customers. Recently, that number has been around 15,000.
"On the collections side, the solution was really a matter of basic blocking and tackling rather than technology," Hund says. "Our average bill is a little over $1,000, so we have a lot of them. With some of our larger customers, we found that if they had a dispute with any of our bills, they wouldn't pay the whole batch. We said that was unreasonable, and started having the marketing arms of our business units work on why we had disputed bills and how we could correct them. We got great support from those folks. At the time, our days sales outstanding, by our calculations, was about 50. Now we've got it down to 29."
"As a general theme, we've become very cash-flow-oriented," Hund concludes. "After our merger in late 1995, we went through a period of years in which we were not generating free cash flow, because we had heavy capital expenditures. In 1999, we began generating free cash flow, and we've begun to focus on all the elements that drive it. For example, while a lot of companies forecast income, we go through a fairly rigorous cash forecast once a month. It covers everything from payables to receivables to inventory to revenue to everything else on the P&L side."
The benefit of free cash flow, of course, is that it allows the company to invest in its own business. "Everything falls like dominoes from free cash flow," Hund says. "It provides us with alternatives. Right now, the alternative of choice is buying back our stock; we're in the midst of a fairly substantial buyback program. But it could be increasing dividends or making acquisitions. All those things are not even on the radar screen if you don't have free cash flow."
Technology Titan
Jim Schneider, senior vice president and CFO of $25.3 billion Dell Computer Corp., would agree. His firm is legendary for its just-in-time inventory controls, which allowed it to post inventory turnover in this year's survey of 35.7, or the 46th best performance of the 1,000 companies surveyed. That's up from inventory turnover of 14 in the 1997 survey, which ranked it 153rd that year.
But the company wasn't always a cash machine. Schneider, who arrived in 1997, explains that in the mid-1990s, Dell was generating marginally positive cash flow or, in some cases, negative cash flow. "We were enjoying profitless prosperity," he says.
Fortunately, he found a company where paying attention to working-capital metrics was already a part of the corporate culture. So rather than change direction, the company put even more focus on cash flow. For example, Schneider took a domestically oriented asset management team in the United States and transformed it into a global financial services group that would share best practices with Dell business groups around the world. In the area of receivables, it prodded Dell's international operations to push harder for leasing and credit card payment plans, which lead to faster payment of receivables.
Schneider also pushed responsibility for collecting receivables into the business units, where it could be best handled by the people closest to the customers, while retaining a centralized structure for accounts payable, with one accounts payable center for all of the United States, one for Europe, and one for Asia.
Meanwhile, Dell also continued to refine its Web-based supply-chain structure.
"One of the biggest benefits from keeping inventories down was that it allowed us to capture declines in component costs very efficiently," observes Schneider. "The less inventory we had as component costs declined, the better off we were. That led to bigger cash balances, more interest income, and the chance to take that cash and invest it in ways that benefit our shareholders." Schneider notes that Dell has invested $800 million in Dell Ventures, a venture capital operation; and, from February 1996 through April 2000, it bought back 817 million of its shares at a cost of $4.6 billion.
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