Tag Archive for Working Capital Turns

The “Newness” of Practicing Fundamentals

My clients often ask me, “What’s new Jim? Show me something new.”  They are looking for a guide through the Cloud or a new way to manage a process.  Perhaps a “new” competitive advantage you could give your company is mastering the “old” fundamentals in every process, with every employee.

In other words: Get great at the basics first.  Basics can be fun, basics can be “new” to some (or many) of your processes, basics can be your competitive differentiator!

Here’s a great example…I don’t play basketball, but I respect the value of a good coach.  John Wooden, one of the most winningest coaches in college basketball (winning 10 national championships), is a stalwart example of the power of fundamentals.  Coach Wooden was famous for taking the best players in the country and making them practice 500 layups or 500 free throws over and over – the basic fundamentals.  Why?  So they would, unequivocally, make those shots in the clutch moments of the game.

Is winning 10 national championships a differentiator? You bet!  Is winning 10 national championships dependent on being the best at the fundamentals?  Of course! Ergo, being the best at the fundamentals is a competitive differentiator!

Working Capital Turns (WCT)

So, let’s get back to differentiating your business by practicing fundamentals relative to Working Capital. Working Capital Turns (“WCT”) is a fundamental metric…one many companies do a poor job of managing.  It takes understanding the levers that move WCT and employing a systematic, consistent approach to managing those levers.  Systematic consistency are fundamentals and it takes a focused, disciplined approach to ensure they are embedded in the processes and culture of your organization.

Let’s do some simple math to illustrate the point.  Let’s say you are now an owner of a manufacturing company (congratulations!) with working capital turns of 4.  This means that given the efficiency, or lack thereof, of the current state of your processes, you convert your Receivables, Payables and Inventory into Cash four times per year. So, every 90 days or so, your net working capital is deposited into your bank account to be used for strategic acquisitions, re-investment or whopping bonuses.

This also means that a full quarter of your sales are hung up on your balance sheet…It makes for a stronger looking balance sheet, but that cash is not working for you like it should!

What if you practiced some fundamentals…and focused on increasing those turns?

Extending the illustration, if your manufacturing company generated $200M of sales, a one-turn increase of working capital would free up $10M in cold, hard Cash from your balance sheet.  What could you do with an extra $10M right now?  Use it to buy out a competitor?  Merge with a supplier – become more vertically integrated? How about invest in new technology? How would you use extra capital to deliver more certainty of success to your business?

Practicing the fundamentals is often passed over in favor of something “shiny and new” – but when it comes down to getting results – it is often consistently practicing fundamentals that makes all the difference.

Let me leave you with a timely example of the importance of consistency and practice: Steven Holcomb is considered the best bobsledder in the world.  In the 2014 Winter Olympics, why did his team only take the Bronze, while the Russian team took Gold?  Answer: the Russian team practiced more.  Being from the area, the Russian team was able to practice the run many, many more times than any other team, so they knew the nuances of the track in all kinds of weather.  That’s what gave them the advantage.  Take a hard look at your processes…is your company set up for Gold?

Jim Harper is a director in BlumShapiro’s consulting group, specializing in middle-market/large client offerings including CFO solutions, shared services, process reengineering and business process outsourcing (including control and internal audit) for the firm’s business solutions and technology consulting practices.  He has diverse experience in finance, finance transformation, accounting, reporting, controls and operational management.