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September 5, 2006

TRACKING THE NUMBERS

Outside Audit

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How U.S. Firms Make Capital Gains

Corporate Cash Piles Grow Amid Improved Efficiency In Daily Business Operations
By DAVID REILLY
September 5, 2006; Page C3

Big companies are doing a better job of squeezing money from their businesses through improved cash management, helping to bolster what are already growing cash piles at many outfits.

Last year, 1,000 of the biggest U.S. companies freed up about $72 billion through improvements in collecting bills, turning over inventory and stretching out the amount of time they take to pay their own suppliers, according to a survey by Hackett-REL, a unit of business-consulting firm Hackett Group that focuses on working-capital issues. These companies reduced the amount of money they have tied up in such working capital -- the cash used to finance the day-to-day operations of a business -- by an average 5.6% from 2004, according to the survey. Of the 82 industries surveyed, 45 improved their working-capital situation, while 35 worsened and the rest were unchanged from a similar survey in 2004. "Companies with a higher appreciation or need for free cash flow are the guys who continue to get better," said Stephen Payne, president of Hackett-REL. Among sectors that registered the biggest improvement: cable broadcasters, which saw workingcapital needs decline 46%; big oil companies, which posted a 45% drop; and marinetransportation companies, which had a 30% fall. Among sectors that saw deterioration in workingcapital requirements, meaning they had more cash tied up in running their businesses: cosmetics and personal-care companies, newspaper publishers and software concerns. Reducing working-capital needs can lead to significant improvements in a company's overall cash flow. For example, a 33% reduction in working-capital needs at Cardinal Health Inc., which provides products and services to health-care providers, resulted in a nearly $1.7 billion increase in cash in 2005, according to Hackett-REL. At machinery producer Caterpillar Inc., an 8% reduction in working-capital needs freed up about $2.4 billion in cash last year, the firm said. The efficient use of working capital has, in turn, helped many companies boost the cash that has been flooding into their businesses: In 2005, companies in the Standard & Poor's 500-stock index, for example, saw cash flow increase 13.9% compared with a 13.1% increase the previous year, http://online.wsj.com/article_print/SB115741173427253228.html 9/5/2006

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according to Howard Silverblatt, senior index analyst at S&P, even as their net-profit growth slowed slightly. Companies were forced to pay more attention to cash flow and working-capital requirements when the economy and stock market hit the skids early this decade. When growth isn't an option, companies must better manage what cash there is. Working-capital management is "real-time finance. It keeps a company solvent," said Ken Parkinson, principal at Treasury Information Services LLC, a cash-management consulting firm, and an adjunct professor at New York University's Stern School of Business. "The cost of ignoring it can be drastic; a company can go out of business or have such a heavy financing cost that it will start to impinge on its profitability." Once bust turns to boom, though, companies often get lax and working-capital needs increase, especially as management looks to invest more to grow. That seems to be happening in Europe, where Hackett-REL found that big companies reduced working-capital requirements by just 0.5% in 2005. That followed a period when European companies had been playing catch-up with U.S. peers and had been paying closer attention to cash management. "Over the past few years, European companies have picked the low-hanging fruit in working capital," said Andrew Ashby, president of Hackett-REL Europe. "But now, with the economy on the rebound, companies seem to have shifted their focus toward growth and taken their eye off the ball of improving working-capital management." That hasn't happened in the U.S., where the 2005 reduction in working-capital needs marked a 55% improvement over the reduction a year earlier, Hackett-REL said. That is probably because companies still are feeling cautious in the wake of the bear market. U.S. companies also are reaping the benefit of increased investment in software that helps manage their cash and treasury operations, said Mr. Parkinson. Such technology gives these companies better information about customers, allowing them to make the right decision about when to extend credit and when to "stay on top of them," he added. The Hackett-REL study showed a reduction in the amount of time it takes companies to collect on sales. Write to David Reilly at david.reilly@wsj.com 1
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9/5/2006