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Crisis has companies focused on cash Print E-mail
Saturday, 23 January 2010

By Ronald Fink

Companies are managing their cash more effectively than they were before the onset of the financial crisis, a survey released on Wednesday suggests.

The survey of 53 companies with an average of $24 billion in revenue found that 94 percent consider cash flow optimization to be important or very important.

In 2008, Hackett Group unit REL Consultancy found that cash on companies' balance sheets had fallen by at least 10 percent from a year earlier in all but two industries out of 59, indicating that cash management was a lesser priority at that time.

But most respondents to its latest survey said they now have multiple initiatives underway to improve at least one of the four most important cash-management areas: accounts receivable, accounts payable, spend management and inventory optimization.

Of those with a cash-management initiative underway, 51 percent have initiatives in all four cash areas, 32 percent in three of the four areas, 14 percent in two of the four, and just 3 percent have initiatives in only one.

The survey also found that a steering committee may be an important component of those initiatives. More than 50 percent of companies surveyed reported having a steering committee in place as part of their working
capital governance structure. Fifty-seven percent have such a committee in accounts receivable cash flow initiatives; 53 percent do so in accounts payable; 52 percent do in spend management; and 64 percent do in inventory optimization.

A majority of the respondents said such committees were at least somewhat effective.

The degree of senior-level engagement may also be a factor in the success of such initiatives, according to the survey. Of those companies where C-suite executives took an active interest in working capital management, 88 percent rated their efforts either effective or very effective in terms of cash flow improvement. Among companies where the C-suite took no role, only 55 percent reported such success.

The survey also found greater success among companies that used more working capital tools. Asked whether they used working capital metrics and scorecards, cash target setting, or employee compensation used by the CFO to reinforce cash allocations, companies that used four or more tools had a lower working capital-to-sales ratio.

One tool in particular, a corporate-wide weighted average cost of capital (WACC), seemed to be a particularly effective way to achieve a lower ratio of working capital-to-sales. Although only 32 percent of companies surveyed used a WACC, those that make investments according to it achieved a much lower ratio of working capital to sales.

Of the third that applied a WACC, 73 percent achieved a working capital to sales ratio of less than 15 percent, compared with only 46 percent among those that did not apply the metric.

Finally, the survey found that companies that use employee incentives to drive working capital improvements are more successful. Two thirds of companies surveyed include cash and working capital targets in employee compensation plans. Of those companies, 58 percent have working capital needs of less than 15 percent, compared to 48 percent of those that do not have such targets.

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