DON'T BE SO NEGATIVE
By Steven Crane

The entire landscape for Asian business has changed since CFO Asia first published its annual working capital ranking last year. Many fine companies that soared in reduction of days working capital (DWC) and cash conversion efficiency (CCE) - the principal measures in the ranking - have ceded their high positions and nestled lower on the ranking. Some have fallen off altogether.

Yet the trend downward is not a sign of a vast, region-wide hemorrhage of skills. It signals a distinct shift toward flexibility and balance over a preoccupation with squeezing as much cash from working capital as possible, a sport of CFOs in boom economies. CFOs now allow their customers more time to settle, and pay suppliers sooner rather than later. Instead of 'playing the float' they're easing the game.

"You can squeeze suppliers," says James Irvine, finance director, British American Tobacco (BAT), Malaysia, "but you have to know what the impact will be on their pricing or the relationship. It's the same with customers: 'If you pull back on credit then what is the impact on sales?'"

Liquid Diet

Very bad, if you view the collective wisdom of the CFOs interviewed for this article as the answer. Management of working capital - the amount tied up in receivables, payables and inventory - has always been a matter of give and take in Asia, where customers and suppliers are often heavily indebted and cash-strapped. Ideally, a CFO should convert as much as possible of this illiquid, but vital, resource into cash. The cash can then be pumped into new factories, IT systems, or reducing debt, all of which contribute to increasing shareholder value.

A CFO aces this game by converting working capital to cash so efficiently that liquid money is available almost immediately. This is known as negative days working capital, and it's easiest to attain when times are flush and both customers and suppliers are cash-rich. Famously, US-based Cisco and other darlings of the high-tech boom played best at this, because customers scrambled to get their equipment, and suppliers lent vast amounts on credit on lenient terms. But their success has not been easy to duplicate, and since the collapse of many businesses, the stay-negative approach has seemed increasingly dubious.

Now, even those traditionally adept at converting working capital to cash have cooled their ardor. Irvine wanted to build more flexibility into his management of working capital, despite the company's rich cashflow. "Sure, we can play around with the yield curve and dividends," he says, "but overall, working capital management has won a renewed focus." BAT allocates responsibility for working capital to departments - corporate finance, marketing finance and operations finance. By keeping the finance function close to the ground - receivables, for example, is under marketing's finance manager - Irvine says it's much easier to monitor cashflow.

A slippage in BAT's ranking - to second from first place in its sector and to 98 from 52 in the overall ranking - can be chalked up to the greater autonomy built into Irvine's new structure. Individual departments are best suited to know the conditions of customers and suppliers and may show more flexibility on terms when the chips are down. The beauty of Irvine's system is that it allows leeway to both offer more autonomy to separate departments and the technological means to spot when things go wrong.

Even given the new flexibility, BAT's working capital performance earns high marks. DWC on Irvine's books has dropped to 44 from 52. He's going to need that cash to face increasing competition as the government loosens trade restrictions on foreign companies.

Pursuing a flexible strategy in working capital management is already familiar to most Asian CFOs. Some of them, including Singapore-based Lim Kwee Siah, executive director, finance, at marine transportation company Chuan Hup, mistrust the progressive approach of the Ciscos anyway. "We don't employ benchmarks or use so-called financial modeling concepts," says Lim. "We look at customer requirements and whether returns will satisfy shareholders.

Pragmatic decisions are more effective than applying textbook theory to working capital strategies," he says. Certain aspects of working capital, he adds, like managing accounts receivables, may not offer much room to maneuver when the aim is to increase sales and revenue. "We're more careful now, but you can't be too strict on your credit control in today's competitive environment or you'll lose customers - a certain leeway may be necessary," says Lim.

Please click here for a pdf file of the survey.

Steven Crane is executive editor at CFO Asia based in Singapore.