Working capital - Get to work on capital.

(From Financial Director)

It's remarkable that so many companies appear to be so bad at managing working capital. Earlier this year REL Consultancy calculated that European businesses were missing out on EUR65bn of profit purely because of excess working capital. UK companies were estimated to have 28% (EUR100bn) too much working capital.

If these numbers sound like the product of an over-hyped researcher, consider this: REL estimates that chemicals group ICI could have squeezed an extra EUR1bn of cash out of its business - which would have almost totally eliminated the need for the company's recent EUR1.3bn rights issue. And, at a major US IT company, REL improved working capital by $2.8bn in an 18-month period. Within another two or three years, working capital had been reduced by a total of almost $6bn.

One FD told us at the recent CFO Summit at The Belfry that, when she explained to her sales director what the interest cost was on the accounts receivable, he realised he was looking at a number that was not unadjacent to the profit he thought he'd made for the company.

So working capital matters, it can make a huge difference to the balance sheet and the bottom line - and it's the FD's job to sort it out. The problem is that excess working capital arises because of inefficiencies throughout the company, not just in the credit control unit.

Peter Wolf, an account director with REL, says that part of the problem the FD faces in tackling working capital is organisational structure.

A business with a manufacturing arm in Thailand, a sales operation in Germany and a shared service centre in Ireland doing the invoicing, will be unlikely to have tight working capital, especially given that there will be a manufacturing director, a sales director and an administration director, none of whose employees will be talking to anyone outside of their own silos. "The business is attempting to be global but in fact is very functional. In that environment, working capital is going to squirt out the sides," Wolf says.