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How to Make Your ‘Dash for Cash’ Sustainable

7 steps for releasing cash before the end of the year, while establishing a healthy working capital management lifestyle for the long term.

By Liselore Kolff | December 13, 2018 at 10:18 AM

The Hackett Group’s “2018 Working Capital Survey” reveals a massive opportunity to free up over $1.5 trillion in cash across the United States and Europe. (See Figure 1, below.) This opportunity is cash tied up in receivables and payables. In the United States, the receivables and payables opportunities represent $334 billion and $358 billion, respectively. The opportunities in Europe are a similar size.

Accessing this cash to show a healthy balance sheet is the primary driver for year-end gamesmanship, also known as the “dash for cash.” The result may well meet market and shareholder expectations and have a positive impact on share price. However, playing the year-end game is successful only for the short term.

Companies that access this cash and improve their cash conversion cycle over the long term reap greater rewards. They achieve sustained working capital performance and a subsequent increase in profit. Every seven-day reduction in the cash conversion cycle yields a 1 percent improvement in margin. For a company with EBITDA (earnings before interest, tax, depreciation, and amortization) of 5 percent, that equates to a roughly 20 percent increase in profit.

The challenge for companies, then, is two-fold: How do we release cash from receivables and payables? And then how do we sustain working capital at an optimal level?

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