How to create a culture of continuous improvement around working capital Featured

8:00pm EDT August 26, 2010

Companies that make working capital efficiency part of their organization’s culture have the opportunity to generate more of their capital internally, thereby lowering costs, improving their performance and boosting their competitive position.

When outside capital is needed, good cash flow and working capital management will make it easier to find and less expensive, no matter what the economic cycle.

Smart Business spoke with Joe Rockey, executive vice president, Commercial Banking for PNC, about how attitudes toward working capital have changed and what steps companies can take to improve their performance.

What impact does the current economic climate have on working capital strategies?

Faced with uncertainty around tax law and health care changes, as well as a slowing economic recovery, 400 financial decision-makers told us in a recent survey that they are still ‘hunkered down.’ The strategies they deployed to deal with the financial crisis have become the new normal.

And one of these strategies is to make working capital work much harder.

Even the best companies can do better. And they know it. Ninety-five percent of the financial leaders in the survey said that there is room for improvement in their company’s working capital efficiency.

What steps can companies take to improve working capital performance?

The key is not to treat the pursuit of working capital efficiency as a limited project that ends at implementation but to realize that implementation is just the beginning of an ongoing process.

The first step is to establish best-in-class performance goals around central issues, such as the length of your cash conversion cycle, and develop metrics that measure actual performance against the desired outcome. Continuously monitor performance against your goals and analyze gaps to determine their root causes.

Then, develop and execute detailed action plans to address and remedy performance shortfalls and uncover additional metrics or measures that should be tracked.

What are some of the elements of a good action plan?

Your action plan might include establishing a closed loop procedure to link cash management processes across departments. This move can improve control and decision making and increase operational flexibility.

Consider reinforcing the importance of working capital efficiency throughout the organization. For example, you might tie management and employee bonuses to working capital metrics, sending the message that they are just as important as revenue and profitability goals.

In order for this strategy to be effective, you will need to make the tracking of performance measures transparent throughout the organization.

What role can external resources play?

Look to external resources for fresh approaches to continuous improvement.

Benchmark your results against those of companies that are recognized as best in class for optimizing working capital. Scorecards from industry publications put a microscope on the details of financial performance and can help you identify the most effective companies. Find out how those enterprises manage and measure cash flow performance.

You might even consider reaching out to peers at leading companies to gather more insight, or participate in industry research panels.

Once you make working capital efficiency part of your company’s DNA, it becomes more than a strategic priority. It is a daily pursuit. Continuous improvement naturally follows.

Becoming best in class in working capital efficiency in your industry will lead to lower cost, better performance and an improved competitive position. <<

This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell securities or to engage in any specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.

©2010 The PNC Financial Services Group, Inc. All rights reserved.

Joe Rockey is executive vice president, Commercial Banking, for PNC. Reach him at joseph.rockey@pnc.com.