Banking & Capital Markets

Cash Masters

For all but a few, unlocking working capital is a challenge.
Linda CormanJuly 1, 1998

As companies grapple for competitive advantages amid increasingly fierce global competition, the crucial importance of working capital cannot be overstated. Every dollar locked up in working capital weighs down performance. Once unlocked, however, every dollar supports investment and value creation in the current and succeeding years.

On one level, boosting working capital sounds easy. “It’s basic stuff,” says Karl von der Heyden, a veteran of CFO posts at RJR Nabisco and, until stepping down in April, PepsiCo Inc. “[You] focus on collecting cash faster and parting with it more slowly,” he says. Pepsi, to von der Heyden’s credit, does this brilliantly. It hopped over five competitors this year to garner the top spot in the food and beverage industry. Why? “We decided to run the business as we would run a private business,” he explains. “When you run a private company, you run it for cash.”

For many of von der Heyden’s counterparts, however, unlocking working capital remains a challenge. The 1998 CFO Working Capital Survey, a joint project with REL Consultancy Group, a management consulting firm in San Francisco, underscores the broad range of working capital performance by roughly 1,000 companies in 35 industries, each with more than $480 million in sales.

As in our first working capital survey, published last year, we ranked companies overall and identified the top 10 within each industry group. (See accompanying charts, starting on page 37.) The survey results were derived by combining cash conversion efficiency (CCE)–the efficiency with which companies convert revenue to cash flow–with days of working capital (DWC), which is a summary of unweighted days sales outstanding (DSO), payables, and inventory. Each of these components is ranked separately so that readers can compare the underlying information. All data, from OneSource, are for the 12 quarters through calendar 1997.

As in all surveys of this kind, a word of caution is in order: the analysis is perforce based on publicly reported financial results. Nonetheless, anyone complacent about the general direction of cash-flow management might fret over the results of the 1998 Working Capital Survey. It’s not a welcome sign. Control over inventory and payables shows no improvement over last year; DSO worsened slightly for all businesses. Although companies have wrung more cash from operations, evidenced by a boost in CCE, the gains do not stem from tighter management of working capital. While cash flow from operations leaped, on average, to 10 percent of sales, from 6 percent, DWC actually slid to 64 days, on average, from 62 days. For most firms surveyed, in other words, more working capital sits idle this year than was revealed in the 1997 survey.

Not everybody suffered, of course. Industries turned in mixed results. All told, 16 industries improved their cash conversion efficiency, 8 recorded no change, and 9 deteriorated. Meanwhile, 14 industry groups reduced their average DWC, 3 stayed the same, and 16 lost ground.

In terms of optimal CCE, the petroleum industry blew away the competition by converting 48.1 percent of revenues to cash flow. The secret to this superior performance lies in oil rigs and other off-balance-sheet assets that generate rivers of cash flow. As a consequence, petroleum companies swept the top- most tier of overall rankings.

For most firms with fewer off-balance-sheet assets, process efficiencies such as consolidating operations drove cash-flow improvements, says Eric Wright, an REL senior vice president. That might sound disappointing to advocates of better working-capital management, but Wright sees it as hopeful. When these processes are efficient, he observes, cash rescued from working capital sprints to the bottom line.

A half decade of rigorous reengineering still leaves a treasure trove for companies that fine-tune their levels of receivables, payables, and inventory.

The four companies profiled supply evidence that corporate strategy ultimately governs these levels. The ability to predict demands on inventory gives grocery chain Hannaford Bros. Co. an edge in the 1998 Working Capital Survey, while success at Amgen Inc., in the pharmaceuticals business, rests on its distribution strategy. Divestitures helped PepsiCo shoot past famous rivals in the food and beverage category, while being the low- cost textile producer lifted Unifi Inc. to outperform its competition.