2018: The Year of Working Capital

by Terence Leung

Devising and maintaining a successful working capital plan could make or break 2018.

Working capital -- essentially a measurement of corporate operating liquidity -- has always been a key metric in determining if a company is run efficiently by investors and other stakeholders. But for senior-level financial executives faced with stark tax, financing and capital expenditure choices, devising and maintaining a successful working capital plan could be a make or break career imperative in 2018.
Balancing working capital and a decent cash flow has not been an easy practice for many companies heading into 2018.
Increased leverage, maintaining cash by cutting investments and squeezing the payables cycle has become the norm for many companies, according to the most recent Working Capital Report issued by PwC. In addition, U.S. companies in particular have fared poorly in terms of working capital management when compared to other regions, according to EY’s most recent study, adding that the average cash conversion cycle for U.S.-based corporations increased by 4 percent in 2016.
The result is that several senior financial leaders have already pledged that getting working capital to run as efficiently as possible is a top priority for 2018.
In an analyst call this month, Honeywell’s CEO Darius Adamcyk said that a focus on working capital was one of the “two major highlights” that the firm’s senior leadership discussed in a 2018 kick off meeting.
“In terms of priorities for 2018, I'd say out of the two or three for the year that number one is working capital,” Adamcyk said. “We want to drive free cash flow. We want to drive free cash flow conversion.”
“We're in the early stages of our working capital initiatives, but we're encouraged by the progress so far and more importantly by the opportunities that we intend to pursue in 2018,” added Honeywell’s CFO Thomas A. Szlosek in the same call, explaining that the company had “very strong” fourth-quarter free cash flow and the financial suite is hoping to get another 0.5 point of working capital returns in 2018.
For car maker Fiat, rebounding from a capital investment intensive year is the reason its financial leaders are focused on working capital in the new year.

“You saw that in 2017, we had a negative impact on working capital where the volumes are flat and also had a lot of launches at the end of the year,” said Fiat Chrysler Automobiles N.V. CFO Richard Palmer in an analyst call.  “So we're expecting working capital to improve to a positive number [on] the volume growth and also some optimization in terms of inventories as we get through the launch process.”
For those companies that have already begun reviewing their working capital initiatives, 2018 will be the year to increase that leverage even more. Fortune 1000 spice manufacturer McCormick & Company began to focus on cash flow last year and increased its cash flow from operations to a record $815 million, up from $658 million in 2016.
“Working capital improvement was the main factor driving this increase,” said McCormick & Company CEO Lawrence Kurzius in an earnings call this week. “We're making great progress with our working capital improvements and expect the programs we've put in place will continue the momentum into 2018.”

Terence Leung is AVP, Solutions Strategy at  Greenlight Technologies, Inc.  At Greenlight Terence conceptualizes and manages analytical solutions for finance.  He was previously at Deloitte Consulting’s Finance, Operations and Strategy practice and at solution providers including i2 Technologies