Consulting for Small to Medium size Industrial Products companies
Excellent Working Capital Management drives free cash flow
by Warren Martin, Founder on April 22nd, 2019


Working Capital Management is something that throughout my career as an executive I found was done inadequately to poorly in every business with which I was involved. I believe there were two reasons for poor performance in this area. The first was a simple lack of understanding as to how to improve it, and why it was necessary. The second was simply a lack of interest on the part of Senior Management to play an active, hands on role in driving improvement.
Working capital improvement is accomplished by driving down inventory and accounts receivable (DSO), and increasing payables days. The “how” is something that through experience, I became good at executing. The “why” component is very simple but not really apparent to many. Reduction in working capital increases free cash flow. In all businesses, Cash is King! Extra cash can be used to fund new product development, needed capital expenditures, acquisitions, debt repayment, and dividend increase and share repurchases for public companies.
Senior management talked about working capital and driving cash flow, but never really wanted to get involved…. until I did! If it is important to you, your involvement in the process will illustrate to others in the company that “this must really be important if he or she is a part of the process.”  
A good starting goal is 10% ratio of working capital/revenue for manufacturers of industrial and capital goods products. A cash conversion ratio of 100% (EBITDA/ operational free cash), not considering the financing or investment component of free cash calculation, is considered best practice.
Is your business meeting these goals? Let 15 Consulting assist you in improving your process to achieve best practice targets in this important area of your business.
 


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