Do's and don't's for good cash management: a consultant offers a list of thoughtful and useful ideas for reducing working capital and improving internal efficiencies.

• Author: Ashby, Andrew
• Position: Cash management

With interest rates continuing to rise, oil and commodity costs mounting and ever-increasing pressures from Wall Street to increase shareholder value, it's surprising that some companies are not taking more measured steps to drive effective cash management and increase free cash flow.

Working capital is a highly effective barometer of a company's operational and financial efficiency and effectiveness. The better its condition, the better positioned a company is to focus on developing its core business. By addressing the drivers of working capital, in fact, a company is sure to reap significant operating cost and customer service improvement.

U.S. and European companies have reduced working capital by 3 percent and 5 percent, respectively, compared to last year, showing strong signs that awareness of the benefits of working capital and cash management improvement has been elevated beyond the treasury to the office of the CEO. But while corporate profits may be soaring, corporations are still overlooking billions in cash--a staggering $460 billion in the U.S. and some 480 billion euros in Europe. This enormous sum is literally stuck in transit, a result of inefficient receivables, payables and inventory practices that could be reclaimed with relatively little investment.

Purchase, N.Y.-based REL Consultancy Group calculates that in the U.S. alone, getting this excess under control would reduce total net debt by 29 percent, increase net profit up to 6.3 percent and improve return on capital employed (ROCE) from 13.9 percent to 15.1 percent.

Liberating the billions in cash trapped on the balance sheet is easier than one may think. Dell Inc., for instance--lauded for overall strong corporate management and working capital performance--builds a computer only when it has received payment for an order, and doesn't pay its own suppliers for an agreed-upon period of time thereafter. As a result, Dell enjoys negative working capital and, the more it grows, the more its suppliers finance its growth.

Not all companies can operate like Dell, but most can improve their working capital position by at least 20 percent over time if they pay proper attention to a fairly simple but effective list of cash management do's and don't's.

1 Get educated. There is more to working capital management than simply forcing debtors to pay as quickly as possible, delay paying suppliers as long as possible and keep stock levels as lean as possible. A properly conceived and...