Working Capital Management: What Gets Paid For Gets Done

In a follow up piece to their article on the 2009 Working Capital Survey, CFO Magazine presented several interesting case studies involving companies which included working capital metrics in employee incentive compensation. Not surprisingly, these companies exceeded their working capital management objectives.

It’s surprising how many companies have aggressive working capital objectives yet no compensation or metrics tied to it. This is especially true for Procurement/Sourcing and Merchandising, which have the greatest impact on Inventory and Payables. Further, these functional groups may even have objectives that conflict with working capital management objectives.

As Heineken USA stated, “As we looked at the levers we had to pull to improve our cash – whether it was reducing our inventory cycles, streamlining our cash receipts, or introducing a new payables tool- we recognized that although the initiative was led by finance, it needed to be embraced and supported throughout the entire company.” For 2010, however, only members of Heineken USA’s finance department will have cash-generation incentives built into their pay. The rest of the company will return to bonuses that are based on the company’s financial results.

What I’m curious about is why take the foot off the pedal in 2010?

Is there such a thing as generating too much operating cash flow? Ultimately, companies are valued on operating cash flow. Even if a company doesn’t have any opportunities to invest in their business, I’m sure their shareholders would be happy to see excess operating cash flow used for a share buyback program or an increase in dividends. In addition, a continual focus on working capital management supports key metrics such as as Return on Invested Capital (ROIC).

One last thought on this. If you’re only going to incent one functional group around working capital, why not make it the group that is most responsible for two of the three working capital levers? Procurement/Supply Chain has the most influence on DIO and DPO. Finance doesn’t manage inventory or negotiate payment terms with suppliers. I think it will be difficult for companies to sustain effective working capital management without the constant involvement of the teams that manage inventory and supplier payment terms.