Understanding working capital starts with data. Korn/Ferry International, the executive recruiting firm, used an SAP database to build a capability "to look every day at how much new business is booked across the world," says COO and CFO Gary Burnison. "We've also got an online analytical system that consultants can go to from their desktop and actually see, in real time, their book of business and all the activity in their clients' accounts."
Korn/Ferry began developing a tighter grasp of its working capital performance two and a half years ago, when the firm went through a major consolidation, cutting its personnel worldwide from about 3,000 to some 1,400. Better data reporting through an enterprise resource planning (ERP) system by the 150 or so legal entities through which the firm operates around the world — and better understanding of that data — are the reasons Burnison says Korn/Ferry has been able to cut its average DSO from 60-70 days down to 44.
At The New York Times Co., DSO and days payable outstanding (DPO) are broken down differently than in other industries: DSO is calculated as advertising DSO, circulation DSO, and other DSO; DPO as trade DPO and raw materials DPO — the latter mostly for the newsprint used in newspaper production.
Reports on all six metrics go out each month to the senior executives and financial officers at all 30 of The New York Times Co.'s operating units. Mention of DSO performance often finds its way into senior management's monthly operations meetings, and even occasionally into presentations to securities analysts.
At Keane Inc., an information technology services company where top management began focusing on working capital improvement four years ago, the corporate finance office sets DSO targets by business unit and sometimes by individual client. When the days outstanding number goes up for a particular business unit or client, the matter moves to a cross-functional team that decides how to address the problem. The team includes representatives from field operations and sales, finance, treasury, billing, and accounting.
Keane also had its internal systems team develop analytics that break down DSO by geography and individual client. And it created an internal Website that explains and disaggregates DSO calculations and allows business unit operating teams to build what-if scenarios about their clients' behavior.
The result of all this deeper knowledge: DSO reduced from an average of about 95 days in 1999 to 53 days as of the end of the second quarter of 2004, says Mate Converse, Keane's vice president of finance.
One change Keane made was to pick DSO apart, analyzing days to bill and days to collect to figure out whether the inefficiencies were in its billing or its collections process (see chart). But while DSO is among the most-used metrics in the working capital toolkit — over 75 percent of respondents to the CFO survey cite it as important — some companies have designed new measurements tailored to their particular business. Eastman Chemical Co. — which pays a price for keeping some chemicals in inventory too long — looks at days inventory outstanding, in addition to the more common inventory turns, and breaks out inventories for specific raw materials.
The Walt Disney Co. has developed several new metrics to fit the fact that as a diversified media company it pulls in revenue from many different streams: advertising from broadcast and cable TV commercials and print media, box office receipts, merchandise, theme park tickets and hotel receipts, and so on.
"From the day an invoice becomes due to the day it gets paid is what we'd like to measure — how efficient are they?" says Kathy Clark, vice president of credit and collections at Disney. Accordingly, it uses a collection effectiveness index (CEI), which represents the total amount of money currently billed that should be collected. The important number is the percentage of that total Disney has collected over a given period. Another is days to close, a measure that Disney created, which day-weights the number of transactions outstanding, from the day an invoice is issued to the day payment is actually received. Knocking, say, one day or half a day off that figure generates significant improvement, says Clark.
Better data allows finance executives to monitor business units' performance on accounts receivable more closely and bring pressure to bear where it's needed. Stoller sends a monthly report to financial executives at each of The New York Times Co.'s business units with a note summarizing the trends he is seeing in each of these areas. When he sees a problem, he sends a follow-up note to the CFO of the unit in question.
The variety of metrics that companies use to measure their working capital performance doesn't always help them benchmark against each other, however. For example, Eastman Chemical found that it was difficult to compare its trade accounts payable numbers against other chemicals companies' numbers, because the accounting rules allow a lot of flexibility in how current liabilities can be shown on the balance sheet, requiring the reader to look carefully at the footnotes for details. So treasurer Mary Hall assigned a staff member last year to look deeply into some 15 companies' annual reports and 10-ks and to figure out how to align comparable data to create a trend line showing how best performance shifted over time. What she found: "We stack up pretty well — not best in class, but kind of in the average-to-better end of the scale."
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