Working capital management is often the Achilles heel for small businesses and startups here in the San Francisco Bay Area. Too many companies focus only on sales growth and maybe profits, but too few understand how working capital is crucial to healthy cash flow.
A recent article in CFO Magazine called “Achieving Working Capital Maturity” highlights how few companies improve their working capital management:
“Unfortunately, first-rate working capital management skills are not easy to achieve. The 2015 Working Capital Survey of the top 1,000 companies in North America and Europe found that only 1% of companies have achieved improvements in cash conversion cycle (CCC) — a key measure of working capital performance — for the last three years in succession. (The cash conversion cycle [days] equals days of sales outstanding plus days of inventory outstanding minus days of payables outstanding.)”
Why do businesses ignore working capital improvements?
“Most executives pay little attention to working capital except when facing a crisis, and their indifference is transmitted to the entire organization. Without pressure from the C-suite, no one collects metrics or designs incentives that have a working capital focus, and no one rushes to install the controls needed to manage working capital professionally, or to do the hard work required to simplify payment processes.”
However, this lack of attention to working capital has a bottom-line impact:
“A significant portion of the top 1,000 companies in the survey waste 15% or more of their EBIT [Operating Profit] through inefficient working capital management.”
There are a variety of organizational barriers that tend to discourage more efficient working capital management:
“Two sets of factors prevent companies from achieving a higher level of working capital maturity. The first set is missing pieces. Often, companies lack all the people and systems they need to create a streamlined process for their cash management. Knowledge and involvement of many functions is required to embed changes at the level of execution.
“The second set of factors is conflicting aims. Different parts of the company often want different things. For instance, sales often wants to give lax payment terms in order to close the deal, while finance wants tighter terms to speed up the cash cycle. All in all, more working capital in the system makes most people’s day-to-day jobs easier — a mentality that can be tough to break.”