U.S. Taking Conservative Approach to Working Capital Management

As the economy rebounds from recession, U.S. finance executives are taking a more conservative approach to managing working capital and expenses.  That is according to Working Capital Management in a Post-Recession Environment: The View from the U.S., a study conducted by CFO Research Services in conjunction with the Royal Bank of Scotland. 

Over the past several years, the global recession and slower-than-expected recovery have caused U.S companies to remain cautious in spending and cash management.  Reflected in an awareness of the need to manage working capital more tightly and forecast more carefully, researchers believe this conservatism is a direct result of concerns with access to credit in the aftermath of the financial meltdown and their own organization’s responses to volatile economic markets. 

However, as the economy rebounds, highly disciplined cash management processes and increasing liquidity have taken on new prominence.  As such, two-thirds of survey respondents identify the use of cash reserves to re-invest in operations as their highest priority for the coming year.  One-third believe that strong working capital management will serve as a means for rebuilding market confidence in their companies. 

Recognizing the need to manage working capital more carefully does not imply that finance executives think their companies are doing it poorly, however.  One-half of respondents indicated that they expect to pursue only incremental improvements in working capital metrics such as days payable outstanding (DPO) and days sales outstanding (DSO) over the next year, leading researchers to believe that they are largely satisfied with current working capital performance. 

However, a quarter of respondents said that they will make substantial improvements in days inventory outstanding (DIO), thus indicating an increased concern with managing inventory effectively in a time of weak and uncertain demand.  As one respondent put it, the recession has forced companies to run with less inventory.

These concerns are not limited to the U.S.  This study and other CFO research confirm that finance executives worldwide have serious concerns over weak demand and slumping markets, even as the global economy rebounds.  As a result, executives, specifically those at smaller companies, are looking to negotiate better terms with customers and suppliers. 

The use of trade financing solutions, such as supply chain financing, receivables financing/discounting and consumer or distributor financing, has also been considered, though not as widely as the use of automated cash management techniques.  What was surprising is that these considerations were fewer from smaller companies, given their higher level of stated concern about improving collections and DSO. 

The good news is half of U.S. respondents say they are already taking advantage of automated cash-management techniques available to them. 

Regardless of the push behind companies to improve working capital management, the reality is that these changes will greatly improve business practices over the coming years.  When asked to identify their three most important benefits of improving working capital, survey respondents identified reducing the cost of financing (50 percent), managing risk more effectively (43 percent) and improving market confidence in the company (32 percent).

The real benefit, however, comes with improved control over a company’s financial health – health that can be demonstrated to stakeholders and investors and improve the company's standing in an upturning market.
 

Also In This Month's Issue:

2011 Business Resolutions and Trends:  More Than 75% Say Departments Will Focus On Operational Improvements in the New Year

CFO's, CIO's Work Together To Implement Technology To Thrive In Recovery