Barely Working: The 2003 Working Capital Survey

Companies squeezed more cash from their businesses this year -- but not much. Was it the economy, or too much focus on Sarbanes-Oxley compliance?
Tim ReasonSeptember 3, 2003

Maybe they were preoccupied with governance issues. But whatever the reason, U.S. companies blew some good chances last year to generate extra cash via working capital improvements. That’s the primary conclusion of CFO’s annual CFO’s annual working capital survey, conducted by REL Consultancy Group.

The survey, which examines the 1,000 largest U.S. companies, showed the average company improved its days working capital (DWC) by a meager 2.1 percent. That’s a poor showing compared with previous years — for 2001 the improvement was 9 percent. It’s also just a fraction of the 7.6 percent improvement recorded by European companies.

“This is surprising,” says REL CEO Stephen Payne. “And it’s a missed opportunity, since companies with strong and consistent cash flows are rewarded with favor in the eyes of the analyst community.”

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Clearly, cash was a concern in 2002, as U.S. companies reacted to economic woes by slashing capital expenditures by nearly 13 percent. With the economy sputtering and factory utilization rates running at a low 75 percent, such cutbacks are justified in the short term, says Payne. “But in the long term, that trend will have to be reversed to protect future earnings and cash flows.” Working capital improvements, by contrast, can be maintained even after the economy improves.

Discounting a Discount

Of course, the poor economy is also reflected in the poor corporate results. Days of inventory were cut, on average, by only 2.1 percent — a rate almost certainly affected by sluggish sales. “If sales are flat, it’s tough to increase the rate of inventory turnover,” observes Payne. Meanwhile, days sales outstanding (DSO) deteriorated by 0.8 percent, suggesting that companies were having trouble collecting their receivables.

That’s not surprising, given that the greatest improvement — 3 percent — was for days payable outstanding (DPO). That’s evidence that companies are holding on to payments longer. “It’s the easiest thing to fix because you directly control it,” notes Rob Zimmerman, treasurer of Greif Inc., a Delaware, Ohio-based global industrial-packaging firm.

Zimmerman, who manages a working capital project as part of a companywide performance-improvement effort, expects to significantly increase Greif’s DPO by overhauling the payment terms it currently has with its vendors, as well as by educating Greif’s purchasing managers to look beyond operating profit when negotiating with suppliers.

Even with interest rates at all-time lows, he explains, discounts for prompt payment don’t always mean savings. “I’m sure our suppliers love us because we pay very quickly,” he says. “But with certain large suppliers, it doesn’t make economic sense to take the discount, given our current cost of funds.” Greif’s own customers also are demanding longer terms, he says, making it equally important to educate the sales force about the impact on DSO.

While the working capital performance average for all U.S. companies left much to be desired, some sectors showed notable improvements in DWC, including aerospace and defense (a 14 percent improvement, in large part the result of days inventory outstanding reductions of 28 percent), auto parts (8 percent), and computer-related hardware (5 percent). The communications-technology sector posted an impressive 20 percent average DWC improvement, thanks to longtime working capital stars 3Com and Cisco, as well as notable improvements by troubled firms including Qualcomm and Lucent.

U.S. Versus Europe
A comparison of the top 1,000 companies (by sales, in $billions, for all figures) here and in Europe show European firms narrowing the gap. Despite deterioration in DPO, they improved their average DWC by 7.6 percent. Their U.S. counterparts displayed an unimpressive 2.1 percent improvement in DWC in 2002.
U.S. Firms % Change
2002 vs. 2001
Europe % Change
2002 vs. 2001
Sales $6.76 1.60% $5.75 -4.00%
DWC 55.7 -2.10 55.7 -7.60
DSO 59.7 0.80 60.8 -4.10
DIO 30.8 -2.10 36.9 -6.60
DPO 34.8 3.00 42.00 -1.40
Source: REL Consultancy Group

A Working Capital Glossary

DSO: 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 negative change in DSO represents an improvement. Poor DSO performance may signal weakness in the customer-to-cash (C2C) processes: sales, sales-order processing, and credit and collections management. But other factors can affect DSO, as when companies use payment terms as a sales incentive. While costly, this can be useful — as long as the finance department is aware of the strategy. Likewise, international sales can hurt DSO, thanks to long payment terms in some countries (terms in excess of 100 days are common in Italy, for example).

Securitization of receivables — a popular financing technique — positively affects DSO by moving receivables off the books. As a result, companies with first-time securitizations often showed dramatic DSO improvement in past surveys. As a strategy for improving working capital, it doesn’t reflect improved management of C2C processes. This year’s survey eliminates distortions by adding back off-balance-sheet receivables (indicated by an asterisk in the tables).

DIO: Days Inventory Outstanding = Inventory / (net sales / 365)
Year-end inventories, divided by sales per day.

A negative change in DIO is an improvement. Poor DIO performance suggests weakness in the forecast-to-fulfillment (F2F) processes (inbound supply chain, manufacturing, and the outbound supply chain). However, strategic decisions also cause inventory to vary. For example, a company with a single distribution center may optimize inventory, but take three days to deliver product to customers. A firm with multiple distribution centers may deliver faster, but it must keep more inventory on hand. Companies with offshore manufacturing often save on labor costs, but see inventory increases because of long shipping lead times.

DPO: Days Payable Outstanding = AP / (net sales / 365)
Year-end trade payables, divided by sales per day.

A positive change in DPO is an improvement. It improves working capital and increases cash on hand, but must be weighed against the possibility of discounts for prompt payment. Poor performance in DPO is often a sign of weakness in the procure-to-pay (P2P) processes, which include supplier management, procurement, and payables. For purposes of the survey, payables exclude accrued expenses.

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

The lower the number of DWC, the better. Poor DWC is a sign of poor management of DPO, DSO, DIO, or some combination of the three. In the tables, DWC changes marked by N/M, for not meaningful, have moved from a positive to a negative number or a negative to a positive number.

When DWC is negative (indicating that DPO is greater than the sum of DSO and DIO), a positive percentage change in DWC is actually an improvement. In the tables, we’ve attempted to clarify these instances by adding (i), for improvement of DWC, and (d), for deterioration of DWC, where appropriate.

How It’s Done

CFO’s annual working capital survey, conducted by REL Consultancy Group, was completely revised this year. Companies are benchmarked in their sectors based on DSO, DPO, and DIO. Then companies are given a DWC Quartile Rank (an overall days working capital ranking on a net basis). For each sector, the tables shows the largest two companies (by sales) in each quartile.

REL calculates working capital performance based on financial statements through the most recent 12 months. Data is adjusted to provide comparable figures. Reported sales have been adjusted when possible to account for acquisitions and disposals. Average DSO, DIO, DPO, and DWC for each sector are calculated on a weighted basis by sales.

Return on capital employed (ROCE) compares operating profit with total capital employed. Capital employed (CE) is the sum of total equity and gross financial debt.

See the 2003 Working Capital tables

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