As the business adage goes, “Cash is king.”
No truer words were spoken about business. While profits, margins, and costs are key drivers of cash flow for both large and small businesses, managing and improving cash flow is incredibly important.
One of the most important factors of improving cash flow is working capital management. Yet while many companies will focus maniacally on sales, costs, margins, and profits, tracking and improving working capital is often lacking.
A recent study by The National Center for the Middle Market reveals tremendous variances in working capital performance by companies in different industries.
“Most companies are tying up millions in cash unnecessarily—money they could put to better use.”
Tying up unproductive cash in working capital is hurting companies in ways that they don’t even imagine. Typically, this is a result of lack of monitoring and improving processes related to Accounts Receivable, Inventory, and Accounts Payable.
“When we looked at public company data for middle market firms, we found that in every industry, top-performing companies manage working capital up to four times better than their below-average peers. Extremely large differences exist among peer group companies in all three critical measures of working capital management: days receivables outstanding, current inventory levels, and days payable outstanding.”
The effect of poor working capital management results in a scarcity of capital (i.e., cash) which is necessary to invest in growth.
“The financial impact of these differences is staggering. Those companies that manage working capital management metrics well (by collecting sooner, holding less inventory, and taking full advantage of payment terms) have millions of dollars more in available cash than those peers who have their cash tied up in AR or inventory, or who pay their bills sooner than they need to.”