Over the last few decades, companies sharpened their focus on delivering desirable returns to shareholders and embraced some form of return on capital, economic profit or a comparable performance measure. This focus on high returns led companies to scrutinize not just their capital investments, but their use of net operating working capital as well. Net operating working capital consists primarily of inventory and accounts receivable less accounts payable and accrued expenses. Cash balances are often excluded, although it could be argued that some balance of cash is required to run operations. Short-term debt and debt equivalents are also excluded as these are sources of capital provided by entities that expect a return on their investment.

T&R: How can working capital management be improved?
Milano: Companies improve working capital efficiency by reducing inventory levels using better management techniques such as just-in-time, lean manufacturing and process reengineering. Invoicing systems, payment clauses in contracts, tighter credit scrutiny and improved collections have reduced accounts receivable. And many adopt accounts payable practices designed to pay vendors on the last possible day to take advantage of supplier capital. Indeed for many companies, reducing the investment in working capital has become a way of life.

I initiated and was heavily involved in a working capital improvement program at the Grumman Corp. (now part of Northrop Grumman) in the early 1990s and can attest to the challenges of improving performance in this area. We dramatically improved work-in-process, raw materials and accounts receivable, and I became convinced that the sizable jump in our share price was related to the substantial improvements in return on capital that resulted from our efforts.

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

  • Critical Treasury & Risk information including in-depth analysis of treasury and finance best practices, case studies with corporate innovators, informative newsletters, educational webcasts and videos, and resources from industry leaders.
  • Exclusive discounts on ALM and Treasury & Risk events.
  • Access to other award-winning ALM websites including PropertyCasualty360.com and Law.com.

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.