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Many companies that have made significant investments in working capital are still using the same metrics and analysis methods they were using 20 years ago. This is unacceptable for most organizations.

For a company with $1 billion in sales, total working capital can easily fall in the range of $400 million to $500 million. Ratchet this up to $5 billion in sales, and the total working capital may be well over $2 billion. A 10 percent improvement in working capital could yield a $200 million improvement in cash flow and liquidity.

The potential benefits of improving working capital management should come as no surprise to a modern finance executive. Still, most companies have soft measures for working capital, or they measure their working capital performance using simple financial ratios. These basic financial ratios are often so inaccurate or misleading that they make it impossible to really understand performance. Thus, they inhibit the company’s ability to accurately measure change, forecast results, or track working capital improvements.

 

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