Companies are beginning to see this opportunity, with half of the firms surveyed, including several subsidiaries of American firms, saying that the need to improve working capital, one of the key financial levers impacting a company’s day-to-day cash flow, is now either “urgent” or “very urgent.”

In addition, the survey also found that 73 percent say their companies have put in place incentives for senior management specifically for working capital and cash management, with these incentives averaging approximately 25 percent of senior management’s total bonus. Notably, 70 percent cited the board of directors of their respective companies as now taking a leadership role in reducing working capital in their firms.

These results are striking in that working capital improvement, a balance-sheet metric, has historically been considered to be less important for companies than income-statement metrics, such as revenue and earnings. That seems to be changing, however, as issues such as increasing globalization, pressure from hedge funds and private-equity funds, and the recent credit crunch spur more and more companies to pay greater attention to their balance sheets in general and to their liquidity in particular.

Said Wicks: “As this survey reinforces, working capital is no longer something that any company can afford not to maximize to its fullest. In the past, focusing hard on this metric might have been seen as something only distressed companies had to worry about, with the danger of running out of cash looming. But in today’s world, liquidity is often as important, or more important, to companies than short-term revenue or earnings increases, whether it’s to fund growth of the business or to fend off distress itself.”

Perhaps not surprisingly, the majority of respondents said that of the three major elements of working capital—inventory, receivables and payables—the areas that present the highest opportunities are inventory, with 68 percent deeming it “important” or “very important,” and receivables, with a 53 percent rate. This is perhaps because better management of payables (to suppliers, etc.) is often easier to achieve. Nonetheless, 31 percent of those interviewed rated payables as an area of high opportunity.

“The average company today has the equivalent of three full months of its sales tied up in working capital,” said Jim Peters, a managing director of AlixPartners headquartered in New York. “That includes a huge amount of cash tied up that could be put to much more productive uses, while at the same time actually increasing a company’s real economic profitability. Smart companies today are already taking a page from the book of, among others, private-equity firms and focusing like a laser on cash and working capital. They’re generating their own liquidity both as a cushion against tough times and as an arsenal for expansion.”

About AlixPartners
AlixPartners is a global restructuring, consulting and financial advisory services firm, with offices in Chicago, Dallas, Detroit, Düsseldorf, London, Los Angeles, Milan, Munich, New York, Paris, San Francisco, Shanghai and Tokyo. It is on the Web at www.alixpartners.com.