Working Capital Management often represents the most substantial performance improvement opportunities available to a company. While optimizing levels of accounts receivable, inventory, and accounts payable will not show improvement on a P&L, the reality is that the cash flow generated from working capital management represents a lower cost source of funding than additional debt or equity, and as such robust working capital management generally conveys a strategic advantage over less disciplined competitors.
1) Size of the Opportunity. A recent survey of 1,000 major U.S. companies found a potential cumulative cash flow improvement of $1 trillion through working capital management.
2) Early Warning System. Careful attention to working capital sensitizes companies to subtle changes in their operations (slow-paying customers, falling demand for key items, trouble in the supply chain, etc.), and so gives attentive managers advance notice that something may be wrong.
3) Maximizing Value. Strong working capital management is a discipline that is hard to develop, and easy to lose. For those companies that stay focused, though, the increase in enterprise value can be substantial.
About the Author
David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition. Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies. David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation. He can be contacted at: firstname.lastname@example.org.