Need Cash? Look Inside Your Company

The boom years have made business careless with working capital. So much cash was sloshing around the system that there seemed little point in worrying about how to wring more of it out, especially if that might dent reported profits and sales growth. Today, capital and credit have all but disappeared, customers are tightening belts, and suppliers aren't putting up with late payments. It's time, therefore, to take a cold, hard look at the way you're managing your working capital. If you do, say Insead professors Kaiser and Young, you'll very likely find that you have an awful lot of capital tied up in receivables and inventory. In this article, the authors explore six common mistakes that companies make in this area: managing to the income statement, which can encourage executives to tie up capital in stock and receivables because income statements often fail to include important cost items; rewarding the sales force for growth alone, which makes concessions in the terms of trade more likely, as salespeople look for ways to get customers to buy; overemphasizing production quality, which often results in gold-plated and slow production processes; tying receivables to payables, because even an unfortunate and costly change in supplier terms should in no way be a reason for revisiting the customer relationship; applying bankers' current and quick ratios, which tends to increase the likelihood that a company will face a liquidity crisis; and benchmarking competitors, which can make managers complacent when their working capital metrics are in line with industry norms. Simply correcting these mistakes will release a lot of hidden cash.

• Finance and investing