Working capital. It's the lifeblood of business, ensuring corporate survival on a daily basis. Yet it's also a huge black hole, sucking up billions in cash on corporate balance sheets -- cash that could be reinvested in the business or even returned to shareholders.
Working capital, simply defined, is current assets less current liabilities. It represents cash tied up in receivables, inventories, and other short-term investments, plus liquid cash, net of short-term financing provided by payroll float (accrued, but not actually paid, salaries); customer payables; and short-term debt.
REL Consultancy Group publishes an annual report on working capital levels, and the latest edition estimates that U.S. companies have nearly $590 billion of excess cash tied up in working capital that could be recaptured without hurting ongoing operations. This cash could easily be redistributed to shareholders, increasing dividend yields while reducing total invested capital and enhancing ROIC. Liquidating this cash would be a win-win situation for companies and investors alike.
So how does a company free up working capital? Well, because much of the cash is tied up in stale inventory and short-term customer credits, reducing cash conversion cycles (CCC) is the best method for liquidating working capital. The CCC essentially represents the number of days it takes a company to turn inventory into cash, and the longer the CCC, the greater a company's working capital requirement.
Efficient processes are the key to short cash conversion cycles, and process improvements can significantly affect working capital management. By focusing relentlessly on supplier management and logistics, Wal-Mart
If you keep an eye on the cash conversion cycle, you'll find companies squeezing every last bit of cash from their business and hopefully claiming their share of the $600 billion cash prize.
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Fool contributor Chris Mallon has trouble squeezing a few bucks out of his working capital, let alone 4 billion of them, and he owns none of the companies mentioned.