Financial executives have tried many ways to increase free cash flow and reduce working capital. DRS Sustainment Systems Inc. (SSI) in St. Louis, Mo., did it with a lot of help. The defense and aerospace contractor essentially enlisted its workforce in the effort by promoting a "culture of cash."
It was time for action. Between April 2007 and May 2008, SSI's working capital grew 41%, more than twice as fast as the 19% increase in its revenue. Free cash flow had fallen to just 78% of operating revenue, 13% below expectations.SSI didn't really have a treasury problem or need a treasury-directed fix. As a division of DRS Technologies, now a subsidiary of Italy's Finmeccanica, its treasury was a remote corporate function, little involved in improving working capital at the SSI level. The unit had a pervasive business operations problem, and the solution lay in mobilizing the whole workforce to think and care more about cash, explains Shane Hegarty, director of engineering services and logistics.
The root cause of the problem was a lack of employee knowledge and sensitivity to cash, which led to poor decisions and behavior, negatively impacting the division's cash performance. Progress had to start with awareness when proposals were formulated and carry through to contract close-out; all related to contract structure and terms and conditions, inventory, receivables, and program execution.
"Employees knew that cash was important, but they were working in silos with little sense of how their decisions were hurting our free cash flow," observes Mike Jones, manager of business administration and contracts.For example, SSI might be making a sophisticated product for the U.S. Department of Defense under a contract that called for progress payments. Depending on how the production team organized its work, SSI might qualify for a progress payment in September, October or November. If the team lacked cash awareness, the payment was likely to arrive in November. With cash awareness, it was likely to show up in September.
So business leaders organized a campaign to promote awareness across SSI's three locations, in St. Louis and West Plains, Mo., and Melbourne, Fla. The six-month cash awareness and education campaign included weekly messages, reinforcing quizzes, slogans and branding, rewards and recognition. The company published a Cash Management Best Practices Guide. SSI put in procedures that recognized positive and negative impacts on free cash flow, and it measured progress with simple metrics that focused on cycle time.
While cycle timing and working capital trade-offs can be complex, SSI kept its campaign simple, Hegarty says. "We focused on decreasing inventory, increasing days to pay while decreasing days sales outstanding, reducing past dues and speeding up progress billings," he explains."Our goal in the campaign was to return free cash flow to at least 85% of operating income and reduce working capital by 10%," Jones reports. One year into the campaign, SSI's working capital was down 22% from May 2008, reversing in large part the 41% surge over the previous year. While revenue was increasing, the company's working capital ratio dropped by 7%, a big improvement over the previous year. SSI continued to grow at the same time it was using less working capital to sustain growth.