Money tied up in working capital (defined as the difference between current assets and current liabilities) often results in decreased cash flow and increased borrowing costs for companies of all sizes. It is money that is not available to grow the business. So chief financial officers strive to keep working capital to the lowest level appropriate for their respective industry.
The September issue of CFO Magazine shows that chief financial officers for the largest 1,000 publicly traded companies in the United States have reduced the amount of cash tied up in working capital for the fourth consecutive year. Yet despite the improvement, these same companies have over $450 billion of cash unnecessarily tied up in working capital in the form of past-due receivables, vendor invoices that were paid too early and excess inventory.
Stephen Payne of Hackett-REL, a consulting firm which advises companies on reducing working capital, claims that more progress is being made in the reduction of receivables than in inventory levels for two reasons.
First, chief financial officers can make more of an impact on receivables far more directly than on inventory. It’s tough to tell the head of operations to cut back on inventory when your own team is doing a sub-par job of collecting the cash.
Second, as more companies embrace offshore manufacturing, they sometimes need bigger inventory buffers to account for the sheer that goods must be moved, particularly during periods of unexpected demand.
Over the next few days, I plan to create a few more postings on the subject of working capital. I’ll highlight a few more items from the CFO magazine article and tell you about a discussion I had with a provider of business process outsourcing (BPO) on a fast growing tool which is reducing working capital.
How are you keeping working capital to a minimum in your company?
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Related Tags: working capital, cash flow, chief financial officer, CFO Magazine, Stephen Payne, Hackett-REL, accounts receivable, inventory
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