Monday, October 09, 2006

Working Capital - A $450 Billion Challenge

As I mentioned on September 17, the 2006 Working Capital Survey in the September issue of CFO Magazine shows a wide range of performance in minimizing working capital among the 1,000 largest publicly traded companies in the United States. With over $450 billion of cash unnecessarily tied up in working capital, the chief financial officers of these companies are seeing a stronger focus on working capital and free cash flow by the analyst community.

In reviewing the survey conducted by Hackett-REL, a consulting firm which advises companies on reducing working capital, one notices significant differences in working capital levels between companies. As measured by “days working capital outstanding”, the airline industry is the most efficient user of working capital with the median score of 5.3 days. Not all that surprising given that most airline receivables are in the form of credit card receipts and the real inventory for the airline industry, its seats, are not considered inventory for accounting purposes. By the way, industry stalwart, Southwest Airlines, actually has a negative number for days working capital outstanding!

At the other end of the spectrum, the pharmaceuticals industry sports an 85.5 median score for days working capital outstanding. While there is clearly a difference in performance between the best and worst members of the sector, even the most efficient users of working capital within the pharmaceutical sector are not the fastest collectors of cash.

How does your company stack up? How fast are you collecting your cash?

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