Financial Planning & Analysis and Performance Management

17CAPITAL MANAGEMENT AND CASH FLOWWorking Capital

CHAPTER INTRODUCTION

Capital efficiency is a critical driver of shareholder value. Improving the management and turnover of assets can significantly improve cash flow and returns. Unfortunately, due to the emphasis on sales and earnings per share growth at many companies, capital management often doesn't get the attention it deserves. Managers and investors who understand the importance of working capital in cash flow appreciate the role that effective capital management plays in value creation. Figure 17.1 drills down into the key drivers of capital efficiency and asset management and highlights the major components of capital employed in a typical business:

• Operating capital
• Capital assets, including property, plant, and equipment
• Intangible assets, including goodwill

FIGURE 17.1 Drill‐Down Illustration: Capital Efficiency and Asset Management

The balance sheet is a snapshot of transactions in process. Therefore, it stands to reason that a company with greater process efficiency will have a leaner balance sheet than a company that is less efficient. This leaner balance sheet is evident by better performance on measures of asset utilization and turnover such as accounts receivable days sales outstanding (DSO), inventory turns, and asset turnover. In addition to eroding returns and decreasing cash flow, companies that ...