Ever since the recession hit full swing, it’s been working capital this and working capital that. And I’m getting tired of it. And it’s not because I don’t like working capital management. In theory, when it’s done right, working capital management is worth its weight in gold. The problem is, at most companies, it’s still done very, very wrong, and ends up being the lead weight that drags the company down until it drowns.
Here’s what usually happens. The company starts by:
- Paying some invoices early to take advantage of favorable currency exchange rates … which is good and the right thing to do, and then it continues by
- Paying some other invoices early to take advantage of early payment discounts … which is good for the company, but not necessarily good for the supplier. (If it allows the supplier to avoid taking high-interest loans, it’s good. But if the company is just taking advantage of their financial problems, it’s not.)
And it enables these early payments by:
- Delaying payment to other suppliers … which is not working capital management at all as it risks the suppliers’ ability to deliver and jeopardizes the supply chain.
- Delaying payment to contractors … which could jeopardize the contractors’ solvency if they’re small and it goes on for too long.
- Delaying raises and bonuses … which does wonders for employee morale.
- Delaying expense reimbursements to its employees (from two weeks to four, four weeks to eight) … which is just wrong. Employees aren’t a company’s piggybank.
And then, when there’s no slack left in the system, it:
- Lays off 10% of the workforce.
And proves it doesn’t know a damn thing. And that’s why I don’t like hearing all this substance-free hype about working capital management.