As CFOs and treasurers continue to find external funding tight, more are looking at freeing up cash from their own operations — particularly their supply chains. A recent report, “Supply Chain Management: A Source of Corporate Liquidity,” by financial research firm Celent, identifies steps companies can take to do this. More information on the report is available here.

At many leading companies, improvements and efficiencies in supply chain functions that impact the P&L, such as the introduction of Six Sigma practices and other production efficiencies, already have been made, the report notes. So, execs now are turning their attention to functions that flow through to the balance sheet, like AP, AR, and inventory holdings.

By manipulating these, companies can boost working capital. That’s key when they’re finding it hard to scare up credit from outside.

Working capital can be calculated as accounts receivable plus inventory minus accounts payable. This calculation then can be taken a step further, to the cash-to-cash (C2C) cycle time. That is:

C2C = Days Sales Outstanding (DSO) + Days Inventory Outstanding – Days Payable Outstanding (DPO)

Improving C2C means doing some combination of the following: reducing days sales or inventory outstanding, or boosting days payables outstanding. A few ways to get there:

To cut inventory holdings: Optimize shipping routes and resell slow-moving inventory through electronic auctions.

To extend DPO: Work with suppliers to reduce inefficiencies and to let them know when they’ll be paid.

To reduce DSO: Incorporate credit terms into price calculations and offer varied terms to different customers, such as shorter terms for newer customers.

These steps have tended not to get a lot of attention from execs, who’ve traditionally focused on boosting the bottom line. After all, those are the activities that tend to make up the firm’s raison d’etre. However, more efficiently using the assets that appear on the balance sheet also is key to increasing a company’s value. ###