From a corporate perspective, the dark clouds of the recession did have one silver lining: Companies improved their working capital performance. With revenue opportunities stalled, if not declining, organizations enhanced their working capital due diligence, growing margins by taking an ax to days sales outstanding, payables outstanding, and inventory.
No sooner did the dark clouds disperse, however, than some companies went back to their old ways of mismanaging working capital, effectively letting go of the rigor. In their eagerness to land new customers, some companies extended payment terms and let inventory levels rise so that they would have enough product in the pipeline and on the shelves to satisfy percolating demand.
One way to measure the pendulum’s gyrations is to maintain a close watch on the sales-working capital metric, which is working capital divided by sales. “The goal should be to keep the metric as stable as possible, whether sales are going up or down,” said Wojcik. “When opportunities are rising quickly, you want to be able to release working capital to invest more money in sales efforts.”