Top U.S. companies find benefit in reducing working capital

The largest 1,000 companies in the U.S. saved $72 billion in working capital in 2005 by enhancing the way they collect bills from customers, pay suppliers, and manage inventory, according to survey results from Atlanta-based consulting firm Hackett-REL.

Working capital is the capital invested in operating processes to buy, make, and sell to generate profit. Operating working capital includes trade receivables and inventories less payables. Typically, a reduction in operating capital can be achieved via improved collection, dispute, and credit management; inventory and supply chain optimization; supplier consolidation; and more efficient buying, according to Stephen Payne, president, Hackett-REL.

Hackett survey results indicate top U.S. companies' savings represent a 5.6-percent improvement. Industry sectors with the most success in working capital reduction include oil, marine transportation, coal, and toys.

"More than ever, U.S. companies see the value of improving total working capital performance," says Payne. "Executives understand that this is an exceptional way to free up cash, which can enhance shareholder returns or be dedicated to funding strategic initiatives such as new product development, penetrating emerging markets, paying down debt, or repurchasing shares."

Hackett-REL's survey also found the top 1,000 companies achieved Days Working Capital—a measure of total working capital—of 50.4 days. Improvements came in all three areas that make up total working capital, with the greatest progress seen in receivables, as expressed by Days Sales Outstanding, which dropped by nearly 4 percent. Days Inventory Outstanding saw a nearly 3-percent reduction, and Days Payables Outstanding improved as well, as companies paid suppliers on more favorable terms.

One reason for Days Sales Outstanding's notable improvement is that accounts receivable is the area of working capital where CFOs have the most influence—and they are under increasing pressure to make such improvements, Payne says. Reducing inventory levels, for example, is more of a challenge, as it requires participation from other company operations and typically involves far more complex business processes. Finally, many companies are engaged in some level of offshore manufacturing, which extends the supply chain and may drive higher inventory levels, he says.

Despite ongoing gains, there still is a significant opportunity to increase cash flow by optimizing working capital, Payne believes. For instance, U.S. companies still have $450 billion locked up in working capital, based on the gap between typical companies and top total working capital performers in the Hackett-REL analysis.

"Working capital optimization is inherently complex, as it touches many business processes and people within an organization," explains Payne. "It'sa balancing act, and companies must manage it carefully to ensure low working capital, and the resources they need to fund product development, make and deliver products, and offer high levels of customer service. It's worth thechallenge because the ability to impact the bottom line through working capital optimization is tremendous."