Management Accounting

Off the Shelf: The 2004 Working Capital Survey

Low inventories drove down working capital last year. But will that continue as the economy improves?
Tim ReasonSeptember 1, 2004

For those who rejoiced when the New York Yankees faltered at the start of this season or thought 2003 surely had to be Lance Armstrong’s last Tour de France win, here’s some exciting news: Dell Computer’s working capital performance has slipped.

Well, sort of. The undisputed champion saw its overall working capital grow by 2 days — putting it at a still mind-blowing negative 30 days in CFO’s annual survey, conducted by Purchase, New York-based REL Consultancy Group. Which, of course, leaves even Dell’s best competitors trailing behind like the Boston Red Sox or a German cyclist.

Indeed, despite a deterioration in receivables collection, Dell once again shaved its days inventory outstanding (DIO) — by 9 percent — to three days (four days by Dell’s slightly different reckoning). That’s so low that chief accounting officer Robert W. Davis says the company now thinks of inventory in terms of dollars rather than days.

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But those rooting for the underdogs still have plenty to cheer about. In last year’s survey, it looked as though Corporate America had all but abandoned its working capital efforts in the face of the Sarbanes-Oxley Act and other distractions. While European firms showed impressive reductions in the amount of cash tied up in daily operations (see “Transatlantic Tie,” at the end of this article), U.S. companies barely managed to squeeze more than 2 percent out of their days working capital (DWC).

American companies have fought back since then, reducing their overall DWC in 2003 by almost 4 percent. And, like Dell, their greatest strides were in inventory, which continued to fall despite an improving economy. Overall, U.S. companies saw a 2.5 percent reduction in DIO — 3.1 percent if the auto industry is excluded. Stephen Payne, REL’s CEO, speculates that corporate caution in the face of a faster-than-expected recovery kept the cupboards relatively bare at many companies. The trend is similar for the first six months of 2004, he says.

Dave Harrison, CFO of diversified manufacturer Pentair, sees evidence of an even more lasting change in that post-recession performance. “The productivity we’ve been able to develop during the downtime has an impact on Pentair’s cost structure,” he says. In other words, he explains, the same productivity gains that have kept the job market lagging the economic recovery are also keeping inventories lower. “Eventually, you’ll see the dollars we put into inventory go back up, but turns will continue to go down.”

Pentair’s water-treatment products, enclosures for electrical and electronic equipment, and high-end power tools brought in revenues of $2.7 billion last year. When Harrison joined the Golden Valley, Minnesota-based company in 2000, its tools division was struggling, thanks in part to the troubled start-up of a new distribution facility that was holding up deliveries to customers. With DIO soaring “out of sight” at nearly 80 days, he set an ambitious target of 45 days, or roughly eight inventory turns a year. (Like many companies, Pentair calculates DIO using cost of goods sold, an alternative formula to the one used in CFO’s survey.) “We look at any inventory as being waste,” says Harrison. Today, inventory is down to 60 days, thanks in part to a kaizen (continuous improvement) system that helped reduce both inventory and travel times inside both the factory and warehouse.

Civility Returns

Overall, companies in our survey showed modest improvements in collecting receivables and, surprisingly, a drop in the amount of time they took to pay their own bills. Last year, days payables outstanding (DPO) jumped 3 percent amid reports of companies mercilessly squeezing suppliers or simply delaying payments. This year’s trend suggests a degree of civility has returned at both ends of the supply chain, as companies work out terms with customers and suppliers.

Pentair’s experience is typical. Harrison says DPO was at 28 days when he came to the company. At the same time, salespeople were using payment terms as sales incentives, causing days sales outstanding (DSO) to soar to 72 days. “If you sell and collect in 72 days and buy raw materials and pay in 28 days, that says you are a bank,” says Harrison. “And we are not a bank.”

Eschewing what he says is the common industry habit of setting terms at 30 days but paying in 50, Harrison raised the company’s stated payable terms from 30 days to 45. “The easiest thing to do to get a cash-flow bump is to withhold payables,” he says, “but we don’t think that’s right.” Still, some of his own customers followed that course, which initially made even the longer payable terms he had set for Pentair difficult to meet.

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.

*Note: Many companies use cost of goods sold instead of net sales when calculating DPO and DIO.

REL Consultancy Group, which conducts CFO’s survey, uses net sales across each working capital component to allow a balanced comparison across each DWC element and provide true comparisons between industries. Reported sales have been adjusted for acquisitions and disposals during the year.

To ask questions about REL Consultancy Group’s methodology, or to benchmark your own company using the REL methodology, visit

Transatlantic Tie

After years of lagging behind, European companies finally equal their American counterparts when it comes to working capital.

The end of the financial bubble in Europe was evident in last year’s survey, when a squeeze on balance sheets caused a remarkable 83 percent of European industry sectors to report net declines in working capital. “Europe had a lot of fat, and it was easy to get rid of,” says Marc Loneux, REL Consultancy Group’s chief financial analyst. Although traditionally better at managing working capital, U.S. companies were already well into a downturn, and couldn’t match Europe’s burst of performance. Just 59 percent of U.S. sectors reported DWC reductions in last year’s survey, and average DWC was reduced by less than one-third of the average European reduction.

The 2004 survey once again shows DWC declining in 59 percent of U.S. sectors. This time, however, European performance is on par — 60 percent of sectors reduced DWC. Moreover, the United States and Europe show similar levels of improvement in receivables, inventory, and overall working capital performance. “Clearly, on both sides of the Atlantic there is now a common awareness of working capital best practices,” says Loneux. “It’s part of globalization.”

Ironically, globalization may also account for a slight deterioration in results for Dell, long the leader in working capital management. The company saw DSO rise 20 percent, to 32 days. “As we continue our growth outside the U.S., certain countries aren’t as robust” when it comes to payment and other practices that affect working capital, notes chief accounting officer Robert W. Davis. —T.R.

2003 Change
’03 – ’02
2003 Change
’03 – ’02
2003 Change
’03 – ’02
2003 Change
’03 – ’02
United States
Total 52.1 -2.6% 31.2 -2.5% 29.6 -0.3% 53.7 -3.9%
Total Excluding
Auto Mfring.
41.6 -3.0% 31.5 -3.1% 28.6 -1.7% 44.5 -3.9%
Total 59.9 -0.5% 35.0 -2.8% 41.8 1.0% 53.1 -3.1%
Total Excluding
Auto Mfring.
51.1 -1.9% 34.1 -3.4% 41.4 0.7% 43.7 -5.8%