Current trends in working capital management
Flash back almost three years ago, to the “technical” end of the Great Recession in June of 2009. The depth of the financial crisis was just beginning to be felt, and banks were tightening the reins on credit, which resulted in a credit crunch that made it nearly impossible for many businesses to obtain the capital they needed to grow, much less keep their operations going.
In this environment, cash conservation became the name of the game for many CFOs. To try to squeeze more cash out of their supply chains, businesses focused on tightening collection of receivables, stretching out their payables and reducing inventory.
A Different Scenario
Now, fast forward to today. According to the data revealed in the 2011 CFO/REL Working Capital Scorecard, U.S. businesses are now flush with cash. As a result, the emphasis on wringing every dollar out of working capital seems to have dissipated somewhat.
For example, the scorecard revealed a paltry 2% decrease in days working capital (DWC). Meanwhile, days sales outstanding (DSO) declined by just 0.1% and days inventory outstanding (DIO) and days payable outstanding (DPO) both rose by just 1.1%.
These modest improvements in working capital performance seem to indicate that the emphasis by U.S. businesses has shifted from working capital improvements to sales growth and profit enhancement. “The energy and focus have now been placed much more on the profit-and-loss statement,” noted Mark Tennant, a principal with REL, which co-sponsored the research. “There isn't a continuous focus on cash flow and working capital.”
Meanwhile, business lending activity appears to be on the rise. Data recently released by the FDIC reveals that overall commercial and industrial (C&I) lending by banks increased during each of the five quarters preceding third-quarter 2011 after declining steadily since early 2008. And the growth rate in borrowing among small businesses (as measured by the Thomson Reuters/PayNet Small Business Lending Index) increased by double digits over the previous year for the 17th consecutive month in December.
A New Mindset?
So, do improved corporate balance sheets, a brighter business lending picture and an improving economy mean that CFOs should adopt a new mindset when it comes to working capital management? My answer: Not necessarily. In fact, statistics like those noted here could lead CFOs to adopt a false sense of security.
In the article posted on CFO.com reporting on the results of Working Capital Scorecard, Stephen Payne, Americas leader of working capital advisory services at Ernst & Young, stated that corporate balance sheets may not be nearly as impervious as they seem. Despite an impressive recent comeback in corporate productivity, high unemployment continues to plague the economy, Payne noted. To produce sustainable growth, companies will “have to hire people and invest via capex, and that's going to start depleting their cash hoards,” he said.
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