Indeed, Harrison explains his company's recent drop in DPO — normally not considered a working capital plus — as a matter of morals, not metrics. "We are very uncomfortable withholding [payment] if our terms are 45 days, but for a while we did," he says. With customers delaying payment to Pentair, he explains, the company's own suppliers were told they would have to live with slower payments. "We allowed payables to run up in excess of 50 days," says Harrison. "More recently, we have been pulling that back down to be more in accordance with our stated terms, but also [in accordance] with our values." In July, Harrison also reported that Pentair had beaten its goal of reducing DSO to 55 days.

Cash Culture
"Pentair, like Dell, has got it right," says REL's Payne. "Too many companies play year-end games to boost cash figures." Only process-based improvements, he says, provide sustainable cash-flow benefits. "The more closely you work with your customers, the better your forecasting and the information you provide to your suppliers, and the more efficient the whole operating cycle," he says.

Whether companies reach the "next level" of working capital performance — what Payne describes as "a seamless trade-off between customers, suppliers, and the company in the middle" — will also depend on whether companies are able to maintain their focus. Harrison attributes much of his success in lowering Pentair's DWC to his CEO's daily interest in the company's cash flow. "Cash flow has become a part of our culture," he says. "Every week, the first item on the agenda at our officers' meeting is cash flow."

It's not clear, however, whether U.S. companies will continue to place that sort of emphasis on cash. Corporate America is now awash in liquidity (see "Too Much Cash," August). The question for the coming year is how companies will use that cash — and whether its presence will undermine working capital efforts. "We have seen a big switch from a focus on the P&L to a focus on the balance sheet," says Payne. "Are we going to see that focus switch back? I hope not."

Tim Reason is a senior writer at CFO.

See the 2004 Working Capital tables

How Working Capital Works

Days Sales Outstanding: AR/(net sales/365)
Year-end trade receivables net of allowance for doubtful accounts, plus financial receivables, divided by net sales per day.

A decrease in DSO represents an improvement; an increase, a deterioration. On the chart, which begins below, companies marked with an asterisk have securitized receivables, which can artificially improve DSO without changing actual cash-to-order processes. The survey eliminates this distortion by adding the receivables back on the balance sheet before calculating DSO.

Days Payables Outstanding: AP/(net sales/365)
Year-end trade payables divided by sales per day.*

An increase in DPO is an improvement, a decrease indicates a deterioration. For purposes of the survey, payables exclude accrued expenses.

Days Inventory Outstanding: inventory/(net sales/365)
Year-end inventories divided by sales per day.*

A decrease in DIO is an improvement, an increase is a deterioration.

Days Working Capital: (AR + inventory ­ AP)/(net sales/365)
Year-end net working capital (trade receivables plus inventory, minus AP) divided by sales per day.

The lower the number of days working capital, the better. On the survey table, a DWC change of -X% reflects an improvement (even if DWC itself is negative), while a DWC change of +X% reflects a deterioration. The percent change is marked N/M ("not meaningful") if DWC moved from a positive to a negative number, or vice versa.

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