Working Capital Improvement: The View from 30,000 Feet

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

There has been considerable emphasis in improving working capital among large and small enterprises alike. While the reasons may seem obvious, to state a core objective: unleashing working capital provides more cash for other areas in the business and reduces dependency on credit. According to a recent benchmark by CFO Magazine(c) the working capital metric, DWC – Days Working Capital, of the top-1000 US-based public companies (excluding financial service companies) degraded 8.2% from FY 2008 to FY 2009, the worst degradation in years. Interestingly enough, when reviewing the individual performance of these companies, 464 of these companies actually improved their DWC

The Best are Balanced

Working capital initiatives can seem daunting, but an analysis of the data can lead to some key insights. Using the same data and stack-ranking all 1000 companies by DWC (1 = best improvement, 1000 = most degradation) identifies a trend among the top 25% of companies (Chart 1) who improved DWC by a median of 23%. A deeper analysis of the data on the three sub-metrics which make up DWC — Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO) yields a further understanding into what drove this performance. A key finding is that 29% of the Top 25% of performers saw improvement in all three sub-metrics: DSO, DIO, and DPO. In other words, their improvement initiatives were not just in one area, they were in all three areas.

Median DWC Improvement from FY08 to FY09
The median DWC of the top 25% of performers improved (dropped) by 23%

Looking further down the rankings at the remaining 75% yielded the following insights: 57% of the bottom 75% saw improvement in NONE of the three DWC sub-metrics.

The conclusion from 30,000 feet: focusing on all three metrics greatly improves the odds of improving DWC. Not focusing on all three? The results are obvious.

Thanks, Sudy for explaining the key to improving working capital is to focus on initiatives that improve the core metrics and not the stupidity I ranted about yesterday.

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