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April 19, 2014
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Forward Thinking

Companies struggle to build "cash culture"

Many companies that are fighting to free up cash in their supply chains have not taken the necessary steps to make that happen.

Although cash generation remains a top priority for many companies during the current economic downturn, most organizations have failed to build a corporate culture that can realize that goal. That's the key finding of a study conducted by the consulting firm REL, a division of the Hackett Group Inc. REL specializes in working capital management.

Nearly 95 percent of the 50 "Global 1000" companies participating in the study had implemented initiatives in at least three of the four key areas affecting their ability to free up cash: receivables, payables, spend management, and inventory optimization. Most respondents, however, had not implemented a number of requisite steps to bolster those efforts. For example, only about 60 percent had a steering or project management committee in place. The study found that companies without a steering committee were over three times more likely to describe the impact of their cash-generation efforts as "neutral" or "ineffective."

REL also found that cash-generation programs were far more effective in companies where "C-suite" executives got directly involved; 90 percent of respondents from those companies said their cash-generation programs were successful. Companies that did not have direct support from top management were 40 percent less likely to claim that their programs worked well.

Measurement and accountability were important for building a cash-focused culture. Yet the researchers found that many companies do not factor in the cost of capital relative to such activities as receivables, payables, and inventory. The report further noted that applying a companywide cost of capital as a metric proved critical to achieving a lower working-capital-to-sales ratio. Still, less than one-third of all companies surveyed said they applied a corporate cost of capital to business units' profit and loss.

Employee incentives also played a role in encouraging better use of capital. Companies that included cash-generation and working-capital targets in performance-based compensation programs required significantly lower working capital. Incentives typically were inconsistently applied, however: Although nearly all senior managers had working-capital incentives, incentives were available to only 60 percent of staffers who were responsible for sourcing.

REL's report, "Blueprint for a Cash Culture," is available free with registration at the organization's Web site.

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