Could Incentives Improve Your Working Capital by 5%?
A recent article in the Financial Times noted that big companies in the US and Europe have up to 1 Trillion in cash tied up in working capital, a number that represents roughly 6% of their revenue. Freeing up 83% of that would go a long way to reducing the financial pressure on many of these companies ... and Ernst & Young, who recently surveyed 2,000 companies with respect to working capital improvements in 2008, believe that these companies can take a structured approach to improving working capital and improve their liquidity by 83% (by reducing the amount of cash tied up in working capital from 6% of their revenue to 1%).
The primary piece of advice given is that companies change their bonus schemes to reward improvements in cash performance. I think it makes sense. Sales pros perform best when their commission structure allows them to make progressively more with each sale. Procurement pros perform best when their compensation increases with real cost savings. So why shouldn't supply chain and finance pros perform best when they are rewarded based on optimal cash performance (which greatly decreases the cost of capital)?