U.S. Companies Are Leaving $950 Billion in Excess Capital on Their Balance Sheets, Booz & Company Analysis Finds

Companies can free up significant amounts of cash by better managing inventories, accounts receivables and accounts payables; Booz & Company online profiler offers a quick snapshot of corporate working capital positions

U.S. publicly-held companies are leaving as much as $950 billion in working capital untapped on their corporate balance sheets, according to a recent analysis by global management consulting firm Booz & Company. Even in today’s capital-scarce environment, many organizations have overlooked key opportunities to free up cash that could make the difference in whether these organizations are able to navigate today’s illiquid economy.
The finding is “particularly surprising and troubling” given the ongoing credit crunch and increased public sector injections of liquidity into certain industry sectors, said Barry Jaruzelski, Partner, Booz & Company. “Especially now, when credit is not readily available, untapped working capital is a wasted asset that can be converted to cash quickly with proper discipline.” 
Booz & Company based its results on findings from its Working Capital Profiler, an online evaluation tool that analyzed the working capital positions of North American stock exchange-listed businesses with annual revenues of more than $1 billion. This interactive tool enables corporate finance teams to grade their working capital proficiency versus industry peers, as well as demonstrating how significantly cash can impact performance.
The Summer 2009 issue of strategy+business magazine published “$950 Billion in Extra Capital,” an examination of the Profiler’s findings and a discussion of best practices to effectively manage working capital.
According to the analysis, systematically aligning operations such as accounts receivable, accounts payable and inventory can be highly effective in accessing excess working capital. In one [typical] example, a consumer products maker could add $670 million to its current cash position by speeding accounts receivable days, constraining accounts payable and reducing inventory turns to the 75th percentile of its peer group. “Companies need this cash right now, either to keep the business alive or to invest in improving competitive positions,” said Booz & Company Partner Conrad Winkler.
The Booz & Company analysis also finds a marked difference between leading and lagging working capital performers:
  • Benchmark companies (those in the top fourth of their industry group) demonstrated the ability to reduce working capital positions by an aggregate of 6% since July 2008, whereas the bottom fifth more often experienced increases in the time needed to turn working capital into cash.  Clearly, organizations with a strong command of their working capital drivers are better able to make use of their current assets and leverage cash in times of crisis.
  • Companies that avoid a narrow, functional approach to address the problem are most effective in capturing this value and converting it to cash. Instead, they recognize the interdependencies among functions that have led to poor working capital and use an executive team to determine the strategic approach that would produce the greatest returns.

“Piecemeal initiatives aimed at improving working capital tend to squeeze the balloon, adding pressure to the system rather than releasing the air by freeing up excess cash from the system as a whole,” Jaruzelski noted.