Ten steps to help companies shrink working capital 15-30% by year-end – and keep it off
by Justin Harrison, Director, REL Consultancy, a division of The Hackett Group
Public companies often make a ‘dash for cash’ at the end of the fiscal year to produce a cash flow statement that’s suitable for framing when financial statistics are due to be released. They spend an enormous amount of effort trying to meet estimates of yearly performance and there is more at stake than mere window dressing. Beat expectations and investors reward you. Fall short and so will your stock price. The pressure to perform is so intense that many companies now game the system on an annual basis to make their numbers – especially working capital numbers – look good at year-end.
Common gaming tactics and why they don’t work
Game 1: Plump sales
To hit their revenue numbers, many companies resort to a variety of tactics to give their sales a temporary boost, offering customers discounts to encourage them to purchase more or bulk-buy. While this raises revenue it also hurts gross margins and profitability. The sales force often implements this tactic without completely understanding the company’s capability to produce the product, possibly creating a strain on manufacturing or supply chains as it tries to meet this artificial demand.