Are companies getting better or worse at managing working capital?

Simon Terry, supply chain consulting partner, IBM

What we’ve found in research we’ve done with other analysts, and also some of the analysis we’ve done, as well as conversations we’ve had with clients is that generally things have declined in the last couple of years.

In 2005/06 working capital was fairly flat but, in 2007, across the board there was an average deterioration of about 4-6% in performance whether it be in days sales, days inventory held or in days purchasing. The analysis we’ve done has been across 130 companies but not one of these large, multi-national companies led on all three measures.

The other thing that caught us by surprise was that very few of the leaders in those organisations had a very clear idea about how their performance sat compared to their peer group. They may well have had an idea internally but they didn’t really have a clear idea about how they were performing against the rest of their industry.

Our analysis has shown that the gap between the best ­ those in the top quartile ­ and those who are in the middle ranking is around 30% ­ and that’s 30% across those three working capital measures.

So there’s quite a gap between the best and the rest. There’s a lack of understanding where people sit compared with the rest of their peer group and the indications are that 2008 is going to be worse. People are giving away more advantageous sales terms to maintain those sales and inventory is mounting up as many companies are perhaps moving to more low cost source countries offshore to get their materials from. And they’re building up more inventory to cope with that uncertainty.

Has the current economic climate pushed working capital to the top of most corporate agendas?

Neil Morling, group finance director, EC Harris

Certainly it should do and it has done within the finance fraternity. But it’s almost taken the current challenges of the economy to kickstart the business into thinking about it. Unfortunately, and as is often the case, it’s almost a retrospective call to arms.

This doesn’t just present challenges within the business itself. At the same time we’re seeing the challenges of businesses growing across the international arena which in itself brings challenges of cash management.

So we’re seeing two to three factors coming all at once, hitting the need to manage cash on a far more proactive basis.

There’s the internal drivers ­ more and more pressure from clients ­ as well as more and more pressure from markets. And to some degree, when we’re seeing far more exotic trading models and offerings, it’s often difficult to keep the line between trading profit and cash performance.

There’s a whole host of issues starting to hit businesses on cash and it’s just being exacerbated by the current economic climate at the moment.

What’s the risk of not getting cash management right?

James Barbour, director of accounting and auditing, ICAS

Even though there was a boom in the economy one would expect cash management still to be at the forefront. Having said that, maybe with the boom, people’s attentions were focused elsewhere.
But tied in with that has to be appropriate cash management because cash is king. And those are the words that will be heard in most boardrooms at this moment.

Those who haven’t focused on these areas really will have to do so as there is a shortage of credit available. Companies will need to focus on how they are going to manage these things over the next 12 months or so ­ maybe that’s me being a bit optimistic in just focusing on the next 12 months.

But it really is crucial in the short term to focus on proper cash management. Ask how are you going to get the cash in? You have to make sure you are selling to the right people who are able to provide the cash when you need them to pay. You have to manage that with your outgoings as well and look at effective inventory management.

It’s the real basics here that have to be applied to ensure businesses can continue in the current climate. As we all know, at the moment, businesses could be profitable on the face of it. But if businesses are not getting the cash in, the liquidity problem could lead them down the route of having to seek advice as to whether they could actually continue.

Chaired by Damian Wild

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