With payables stretched to the limit, wringing more cash out of working capital will be a challenge.

Vincent Ryan, Editor in Chief, June 27, 2019.

What CFO doesn’t want working capital to generate cash rather than consume it? To not have to answer pesky analyst questions about lower quarterly cash levels? To not have to draw on a line of credit because customers are paying on time?

No, CFOs would rather be confident that the accounts receivables and payables departments are operating optimally. But that requires attention to detail, and few organizations can focus on this core area consistently.

The 2019 CFO/The Hackett Group Working Capital Scorecard shows that the largest 1,000 U.S. companies remain efficient users of working capital. But, as in most years, they could be doing better, especially at managing inventories.

The 1,000 companies (benchmarked every year the past decade) didn’t perform poorly in 2018. Total net working capital dropped as a percentage of revenue last year despite robust sales, and the average cash conversion cycle (roughly, the time it takes to turn resources into cash) fell to 34.8 days from 35.5 the prior year. To boot, operating cash flow rose 17%.

However, the needle barely moved on the key working capital metrics, and one, days payables outstanding, actually worsened. Why does that matter? These companies’ balance sheets may not be as resilient as they think.

While profitability and sales rose in 2018 for the 1,000 U.S. companies in the scorecard, cash on hand fell 9% from 2017. And many of them are significantly leveraged — they had an average debt of 47% of revenue, up from 35% in 2008. The gap between debt and cash levels is much wider today compared with the period prior to the Great Recession, points out Gerhardt Urbasch, a senior director at The Hackett.

More ominously, many experts see some external sources of cash from the past two years drying up. The Trump tax cuts and greater incentives to repatriate foreign cash put less pressure on working capital efficiency, but now their effect is dwindling, Urbasch says. Meanwhile, tariff tit-for-tat is driving up the costs of imports and raw materials, eating into profit margins when costs can’t be passed on to customers.

All that could put a new emphasis on cash flow. In addition, some companies face internal challenges. For example, DowDuPont, in the midst of a complex spinoff transaction, is spending cash on separating out three entities’ IT systems. To combat that, the chemical giant is “actively working” on days sales outstanding, days payables outstanding, and days inventory outstanding, said Howard Ungerleider, the company’s CFO, at a May conference. Every day of efficiency DowDuPont finds in these working capital areas generates $100 million of additional cash flow, Ungerleider said.

The Easy Part

For the last 10 years, getting better at managing working capital has been largely about fixing only one leg of a three-legged stool: days payables outstanding. Working capital benchmarks have remained respectable because large companies have extended payment terms with suppliers. That has elevated their cash levels.

The scorecard companies gradually went from paying their suppliers in about 45 days in 2009 to about 56 days (almost two full months) in 2017. But the rubber band stretches only so far. Supply chain finance programs ensured that suppliers’ own liquidity didn’t suffer; now, it appears, resistance from suppliers has kept customers from lengthening terms any farther.

While average days payables outstanding (DPO) has risen by 38% since 2008, in 2018 average DPO actually fell (worsened). On average, the 1,000 companies paid their suppliers almost two days faster (in 54.8 days, compared with 56.4 the prior year). A majority (53%) of the 1,000 companies saw this DPO deterioration.

Of course, not all companies have reached the zenith of optimizing payables. The top-quartile performers in the Working Capital Scorecard had an astonishing average DPO of 64.7 days. However, median performers had an average DPO of just 45.3 days.

Columbus McKinnon, for example, a provider of electric hoists and crane components, improved its DPO by 6 days in the first quarter of 2019. That helped push down working capital as a percentage of sales by 70 basis points. Management thinks the company still has an opportunity to delay payments even longer.

The average large company, though, has done as much as it can to stretch terms and gain efficiencies from its procure-to-pay processes, say The Hackett Group’s consultants. For most of them, 2019 will be quite a different animal.

“The easiest component of working capital to improve is DPO, because large companies tend to have leverage there,” says Shawn Townsend, director at The Hackett Group. Once an organization exhausts that avenue, however, it has to move on to another leg of the stool: receivables, inventory, or both.

Tightening Up

Those are much more difficult areas from which to wring cash.

With companies lengthening payment terms the past decade, tightening up on receivables has been tough. For 2018, the scorecard’s 1,000 companies improved receivables performance (days sales outstanding, or DSO) by eight-tenths of a day in 2018 (to 38.5), largely due to increases in revenue. (The DSO equation is accounts receivables at year-end divided by one day of revenue.) Nearly 600 of the scorecard companies saw DSO improvements in 2018. But as a group they have pushed DSO to under 36 days only twice in 10 years, and among scorecard companies DSO is still near its all-time high.

One of the obstacles is the lag in adopting the latest technologies. Companies are struggling with applying them on the receivables side of the cash conversion cycle, says Todd Glassmaker, a director at The Hackett Group. The end-to-end solutions that are available for payables just aren’t ready yet for AR teams. “There are a host of technologies in play but they’re a still a bit immature — it’s also a customer-facing solution, so there is a lot more complexity,” Glassmaker notes.

While companies have leveraged older technology to evaluate customer creditworthiness and prioritize account collections, as well as to automate some collections messaging, they are still figuring out how artificial intelligence and robotic process automation can improve receivables performance.

There are other reasons why lowering DSO may be difficult. As with DPO, the top-quartile performers are bumping up against the natural limits. They posted an average DSO of 26.7 days in 2018, which seemingly would be pretty difficult to improve upon in most industries. “That is probably right up against best possible, given the nature of standard payment terms,” says Craig Bailey, an associate principal at The Hackett Group.

In addition, large companies are unlikely to revert back to paying suppliers in 45 days (like they did a decade ago) and lose their working capital cash cushion.

Instead of sitting on their hands while awaiting better tools, though, many receivables departments will need to work on (1) tightening up internal billing processes and (2) building cash awareness among sales and collection teams, Glassmaker says. In collections, that means giving agents visibility into how they impact corporate targets and, in sales, introducing a working capital element into sales teams’ compensation.

Stock Answers

To make real headway on lowering the cash that working capital ties up, organizations will to have to look in a forbidding place: days inventory outstanding (DIO). DIO among the 1,000 companies fell slightly, to 51.2 days in 2018. That was down from 52.6 in 2017, and the first drop since 2011. But inventory levels still increased 7.4% for the year, and DIO performance was merely adequate — the average DIO among the 1,000 companies was at its second-highest point since 2009.

For many reasons, inventory levels are the most difficult nut to crack in the working capital realm. Economic and industry trends have been working against the notion that holding fewer days’ worth of inventory is a best practice.

The perennially low interest rate environment has made it less painful for companies to carry excess inventory. In addition, some see a competitive advantage in having higher minimum or safety inventory levels due to the complexity of global supply chains.

Inside organizations, finance just hasn’t been able to put the screws to the inventory operations side. What’s been missing is a “burning platform” for the discussion of cutting back on inventory levels, says Bailey. While finance may wish to optimize inventory on a cash-flow basis, manufacturing or operations managers tend to look at costs. In the cash vs. cost trade-off, cash has been losing — in other words, optimizing cash in inventory management has not been a priority.

“From a cost perspective it may make sense for a manufacturer to have very large production runs, but from a cash perspective that might not be the right thing to do, because it’s increasing average inventory,” Bailey explains.

More organizations are beginning to focus on tackling inflated and excess inventory levels, says Bailey. So much so that The Hackett Group’s experts expect 2019 to be an inflection point.

For example, beverage maker Mondelez maintains that it is best-in-class with its low cash conversion cycle. In a late May earnings call, CFO Luca Zaramella said the company tracks payment terms closely and uses advanced receivables and collections management. But its biggest opportunity going forward is inventory management.

“We still have opportunities both in … making the right product available at the right time in the right location, and reducing quite significantly days inventories on hand,” Zaramella said.

Helen of Troy Limited, a marketer of brand-name housewares, is also targeting inventory levels. “We have a lot of improvement we can make in just getting our forecasting and demand planning into a good place where we don’t need to have safety stocks and those types of things that we’ve held in the past,” Brian Grass, Helen of Troy’s finance chief, told investors in May.

Helen of Troy is also trying to consolidate suppliers. Grass said having fewer, more strategic partners that it can use to shorten cycle times and lead times could have “a multiplier effect, along with the demand planning, to get the inventory balances down.”

Lower inventories will be a blessing for any organization if global growth slows and demand from consumers and businesses wanes. The smartest companies will be preparing for it. Some of Hackett’s clients, for example, are paying down debt with the cash they generate through better working capital management. They plan to continue doing that even if the direction of U.S. interest rates later this year is down rather than up.

For most companies, finding that cash won’t come easily, since for many payables are already optimized. They’ll have to look in other areas to make any headway in cutting working capital bloat.

One response to “Working Capital Scorecard:

The Hard Part of Boosting Liquidity”

Steven McLendon says:

Excellent report! We commend you for addressing the key obstacle of boosting liquidity – inventory investment – and to how to “make real headway” companies must gain control by viewing inventory in Days Inventory Outstanding (DIO). While many try to reduce the risk of stock-outs by building up inventories, this strategy is not sustainable as variations in demand/supply and long lead times continue to grow. We routinely see companies holding 2 to 3 times the inventory required to effectively meet demand. While inventory has indeed been the toughest obstacle to date, a new class of advanced analytics replenishment software gives companies the visibility and confidence to eliminate stock-outs and cut stock levels by 20-30%. While a pending economic downturn may drive change for some, others are adopting new strategies to gain a competitive advantage right now. New technology is making this much faster, simpler, and less risky to achieve.

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The Inc. 5000 fastest-growing sunglasses designer and e-tailer relies on the actionable analytics in Balanced Inventory software to achieve the visibility, control, and confidence needed to meet customer demand and sustain triple-digit annual growth rates.

Seneca, SC July 16, 2019 Balanced Flow (, the developer of advanced supply chain and inventory management solutions for retailers, brands, distributors and manufacturers, announces contemporary sunglasses and accessories e-tailer William Painter ( as the latest consumer goods brand to benefit from its Balanced Inventory™ cloud-based inventory replenishment solution. Ranked #380 on the 2018 Inc. 5000i list of fastest-growing American companies, the San Diego-based company designs and markets premium sunglasses through its website,, and other online venues.

According to William Painter CEO Matt DeCelles, “We were experiencing the double-edged sword of hypergrowth. We knew that demand was there to support a product line expansion, but we were concerned that we could lose control without better systems and processes in place. Balanced Inventory has provided the visibility and control needed to sustain our growth by turning inventory faster and reducing inventory cash requirements by as much as 30%. This gives us the confidence to grow our business even more aggressively going forward.”

With a 3-year growth rate of 1,294% from 2014 through 2017, the young company was quickly challenged to improve its inventory forecasting and replenishment processes. While a spreadsheet-based process of sourcing large amounts of stock just 2- or 3-times each year met minimum factory order requirements, it tied up too much cash in inventory. Even with its best efforts, fast-moving SKU’s were still running out-of-stock while slow-movers filled up warehouse space.

To address this dilemma, William Painter took a managed services approach to inventory replenishment based on the innovative Balanced Inventory software. “Balanced Inventory very quickly put us in control of the inventory,” explained Orion Avidan, Expert Inventory Consultant. “The actionable analytics in the system gives us precise recommendations on what stock we need to buy to ensure fulfillment of all orders while avoiding purchases of excess stock. We have tied together marketing and inventory details to accelerate a more predictable and profitable process.”

“We are pleased with the opportunity to play a role in the impressive growth at William Painter,” noted Balanced Inventory CEO Steven McLendon. “We applaud their commitment to profitably delivering what’s selling.”

About William Painter

Founded in 2012, the brand name was inspired by William Painter, the late 1800’s Irish mechanical engineer and prolific inventor of the crown bottle cap, the bottle opener, and nearly 100 other items. Its innovative sunglasses feature titanium frames, nylon polarized lenses, exceptional weight balance, and a lifetime guarantee. Promoted as the most durable sunglasses ever, the frames of the company’s flagship style “The Hook” double as a bottle opener. For more information, visit

About Balanced Inventory

The secret to efficiently increasing turns was discovered during the US Army’s mandate for zero stock-outs and excess inventory. Balanced Flow and Clemson University created a unique, time-based pull replenishment methodology that mitigates forecast error and achieves unparalleled breakthroughs in inventory turns, on-time delivery performance, and inventory productivity. Based on this development, Balanced Inventory™ combines industry best practices and patented analytics to deliver elimination of stockouts, doubling of inventory turns, and up to 30% reductions in inventory investment. For more information, visit

Media contact:

Steven McLendon, CEO

Balanced Inventory

(404) 281-1455

i 2018 Inc. 5000 Fastest Growing Companies in America -

Balanced Inventory is a trademark of Balanced Flow Supply Chain Solutions, LLC

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The “Amazon Effect” has driven interest in Supply Chain efficiency, the ability to power inventory turns to new levels. Moreover, despite huge efforts forecast error has improved only slightly in the past 30 years. In fact, forecasts for consumer products are considered good if they are 60 percent accurate and very good if they are 80 percent accurate. Forecast error plus other process inadequacies such as Min/Max require huge amounts of Turns & Profit debilitating safety inventory not to mention the forecast error may consume your accumulated profit. The secret to efficiently powering turns was found in the US Army’s mandate for zero stock-outs and excess inventory. Clemson University developed a unique, simple, commonsense, time-based pull replenishment method utilizing the key principles of Theory of Constraints™, LEAN™, and Six Sigma™. Astonishingly, it mitigates forecast error and achieves unparalleled inventory breakthroughs in Turns, on-time delivery performance and inventory productivity while eliminating stock-outs and excesses.

The commonsense days-of-sales (referred to as days-of-combat) enable pull replenishment by factoring replenishment lead-times, stockouts, and buffer inventory simultaneously in terms of time. In other words, items in shortest time-based supply status (how long they are expected to meet demand compared with all other items) are replenished first to virtually eliminate stockouts with minimum safety inventory creating an efficient pull. While this method integrates key iTLS principles, it includes multiple other best practices and patented unique solutions. Users can count-on total elimination of stockouts, at least a doubling of inventory turns plus 30% reductions in inventory investment.

Detailed Discussion

Background. The primary focus of inventory management improvements for over 30 years has been and continues to be improving forecast accuracy, but only a few improvements including demand driven MRP (DDRMP) and integrated Theory of Constraints™, Lean™, and Six Sigma™ (iTLS) have been made. While these clearly show great opportunities over standard systems, they have limitations to universal application. So today while dozens of sophisticated forecast-based solutions exist, consumer product forecasts are still considered “good” if they are 60 percent accurate and “very good” if they are 80 percent accurate.

Obviously, forecasts are needed so products can be ready when consumers want to buy them and more so now with the introduction of the “Amazon Effect.” A major reason for inaccuracy is that consumer needs change, but there are other major unsolved inaccuracy drivers.

The inventory management process begins with the generation of a high-level rolled up sales forecast as the basis for annual budgeting and capacity planning. Forecast accuracy is generally acceptable at this level if the propensity for padding at multiple management levels is controlled properly. However, not so when the forecast is exploded to the individual SKU level for replenishment (what to order, make, and move). Forecast error and resulting problems are greatest the closer to individual SKU level and over the shortest time horizons; the environment within which inventory managers must make replenishment decisions.

Root Cause Problems. Natural variations in demand and replenishment lead-times as well as the impact of unmanaged resource constraints, all of which drive forecast error and unacceptable stock out rates, are highest in this environment. At least 16 root cause variation drivers are present in all manufacturing and replenishment operations. So, you see, it’s not the manager’s fault, standard systems and practices are not capable of solving these problems, so managers use the universally accepted solution of adding more and more unaffordable safety inventory to all SKUs to reduce fewer and fewer stockouts. Simply stated, forecast accuracy has reached its plateau with standard systems and practices so a different method must be used to optimize inventory performance.

The Solution. Replenishment pull is widely recognized to be superior to forecasting and pushing primarily because it eliminates forecast error. What consumers buy today is the best forecast of what they will buy tomorrow. A well-known example is Burger King’s “Have it your way” strategy that doesn’t create excess thereby reducing costs and increasing quality in exchange for a short wait. However, pull is seldom used because consumers are not willing to wait the required time and standard systems and practices lack the concepts and tools required to eliminate the long wait times. In fact, we found all known best practices and some unique solutions had to be integrated to enable pull to work by minimizing replenishment lead times and large buffer inventories for all SKUs.

The Pull Signal. Consumers initiate demand and are the only supply chain participants who send a pull signal each time they purchase an item. Everyone else up the supply chain accumulates customer orders to pass them upstream in larger and larger batches infrequently as their replenishment orders. Thus, the daily selling of an item is the ideal replenishment pull signal for order and make entities as the longer the replacement cycle, the larger the point of sale inventory must be.

The Pull Response. inventory must be on-hand to ship immediately upon receipt of the pull signal, but not in the huge quantities for all products used today. This takes us from the symptoms; e.g. stockouts and excess inventory through root causes; e.g. replenishment lead time and demand variations to the core problem.

The Core Problem. The core problem is determining which SKU in what quantity should be replenished next to minimize both stock out and overstock risks while honoring resource constraints. Clearly, the next SKU replenished should always be the one in shortest supply status simply because there is no way to know which one will need replenishment next. So, how do we determine this?

The Primary Solution - Days of Sales. Selling products not only provides the ideal pull signal, but also the key core problem solution. Standard systems replenish SKUs individually and independently of all other SKUs because they contain no relationships between SKUs. Since time is the natural common denominator of all activity, we use it from the forecast to create a projected day-of sales demand quantity for each SKU. This is forward, not rearward, looking and sufficiently accurate to serve as the relative demand common denominator between all SKUs. With this the SKU in shortest days-of-sales status can be easily identified and replenished first. But, what should the upper replenishment limit be for each SKU?

Replenishment Objective. Each SKU must be replenished to a Days-of-Sales objective which consists of:

1. A small on-hand safety inventory to enable immediate shipment, level replenishment ordering, and absorption of demand and replenishment lead-time variations. This normally begins with an RLT of coverage adjusted as necessary based on status to minimize stock out risks upon implementation.

2. Replenishment lead-time days of coverage sufficient for incoming orders or work-in-process.

If there are no constraints, enough inventory is simply added to all SKUs to reach the Days-of-Sales objective. However, constraints always exist and should always be managed to avoid unnecessary costs. For example, cash, credit, time, capacity or other constraints often preclude replenishing to the Days-of-Sales objective so we must avoid over replenishing some SKUs and under replenishing others.

Constraints Management. Scarce resources must be allocated first to the SKU in shortest days-of-sales supply status in a manner to minimize and equalize stockout and overstock risks for all SKUs. To achieve this, we allocate the lowest permitted batch quantity to the SKU in shortest days-of-sales supply status and repeat this process until the objective is reached or the constraint capacity is exhausted. This leaves the on-hand plus due-in or work-in-process orders balanced in days-of-sales for all SKUs.

Balanced SKUs. Simply achieving low level SKU balance enables the virtual elimination of stock outs and about 30 percent reduction in unnecessary inventory. Once all SKUs approach balance in Days-of-Sales, other opportunities for additional improvements become feasible.

SKU Velocity. The next major opportunity is because high demand SKUs are easier to keep in stock than lower demand SKUs because they are ordered, made, and moved every time any SKUs are replenished. Once on-hand plus due-in inventories are balanced, outgoing replenishment orders are automatically balanced, and the balance is normally well maintained for incoming replenishment products. While physical replenishment lead-times might be 30 days, weekly balanced product shipments that match normal weekly manufacturing cycles reduce the effective replenishment lead-times to 7 days for high demand SKUs which are often 50 to 80 percent of all demand. This enables the effective or “virtual” RLT to be much less than the physical RLT for most of the SKUs.

Supporting Solutions. In total, 12 integrated solutions are used to achieve the above and following improvements:

· Obtain current inventory status visibility in days-of-sales.

· Minimize demand and replenishment lead time variations, and over committing of constrained resources.

· Minimize the risks of stockouts and overstocks at the same time.

· Frequently and automatically calculate optimum, actionable replenishment quantities.

· Minimize forecast errors by always being in stock to capture all demand.

Together these solutions provide the commonsense logic with the simplicity to readily focus all managers on the right objectives for achieving the critical goal of maximizing customer service while minimizing inventory investments and expenses.

An Example. Here’s a scenario for applying the BI replenishment methodology to a sales plan. A distributor’s replenishment lead time is 90 days for a product family of widgets that collectively has forecasted demand of 1,000 items per month.

Minimizing replenishment lead times. Since computing replenishment computations in days-of-sales enables balancing all SKUs to the same days-of-sales status, a one-third inventory reduction is readily achievable by eliminating excess inventory. We first set the beginning on-hand inventory target at 60 days-of-sales (one-third below standard replenishment stockage targets) and the replenishment lead time at another 60 days-of-sales for a total objective of 120 days-of-sales on-hand plus on-order. Then, after a few replenishment cycles, we will see a flow of balanced orders going out and balanced product shipments coming in. This balance enables even further stockage reductions of up to a second 30 days-of-sales and sets the stage for additional improvements.

Synchronizing Replenishment to Sales. As these replenishment lead time days and inventories are being reduced, days-of-sales computations frequently check SKU sales velocities making automatic adjustments for the proper lead time into the future. This minimizes both stockout and overstock risks at the same time.

Complex Solution – Simple Implementation. The only known method of making a dramatic breakthrough in inventory performance requires shifting from forecasting and pushing to pulling inventory based on demand. Making pull work requires the integration of all known and several new focused and unique inventory optimization solutions. Most of these solutions are integrated into a program using standard MRP or MIN/MAX input data so that the complexity is handled by the program to compute vastly improved replenishment requirements. Users simply replace the outputs of their standard replenishment computations with these new requirements in a manner that can be implemented in a few hours and run in a few minutes each day.

Proven Performance. Balanced Inventory is an advanced integrated Theory of Constraints, Lean Manufacturing, and Six Sigma (iTLS) based tool developed for the U.S. military and proven by the U.S. Army to perfectly synchronize combat critical products to warfighter needs. In doing this it met three specific objectives that could not be approached by standard methods:

1. Field a new combat system from specialized raw material production through multiple end-item production 25 percent of shortest ever previous time.

2. Have zero stock outs of raw materials, components, and end-items.

3. Accomplish this without building up the massive inventories required by standard systems and practices.

This is a SaaS program developed at Clemson University’s advanced manufacturing facility for the military and is now commercially available and designed to produce on-going benefits of at least ten times it’s annual fee. Typical results include stock-out and associated expense elimination, over 30% inventory reduction with at least a doubling of turns, and at least a 30% reduction in inventory expense and management costs.

Implementation Steps. Balanced Inventory was crafted as a tool to synchronize supply chain-wide order, make, and move replenishment actions with consumer demand. It begins with local implementation to demonstrate clearly the existence of improvement possibilities never imagined. It is structured for easy extension to vendors and customers, thereby improving the profitability of all supply chain partners as they work together for their mutual benefit.

How We Can Help?

Has complex global sourcing coupled with multi-channel sales have you conceding inventory turns and profitability? Are you constantly expediting to meet completions or stay in-stock? Are you filling containers with product you really don’t need? Having trouble finding Inventory Analyst that understand your business? Are you in spread-sheet Chaos? Is your CFO concerned about tight cash?

Implementation begins with an analysis of potential improvements with the first balancing run of a family of products carefully chosen to represent the “center of the business” and moves to a full run of several product families representing the “breadth of the business.”

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