It appears that the economy is slowly and painfully inching toward a turnaround. Unemployment is holding steady at 9.7 percent, reports the Bureau of Labor Statistics. While unacceptably high, the number represents a slight drop from earlier this year. The Bureau of Economic Analysis says that GDP grew at an annualized rate of 5.9 percent in the fourth quarter of 2009.

It all sounds great. And it is. However, a recovering economy can present its own challenges. Most significantly, if companies don’t continue to focus on working capital and cash flow management, they can end up back in trouble.

That’s one conclusion of some research recently completed by REL, a consulting firm focused on working capital management. REL examined the ins and outs of the cash flow of the 1,000 largest public companies in the U.S. The researchers found that working capital performance, as measured by days of working capital (DWC), improved by about 5 percent between the second and third quarters of 2009, to 31.7 days. While a move in the right direction, the number remains worse than it was in 2007 and 2008, when it dipped below 30 days.

The upshot? The companies studied could free up working capital by a combined $700 billion if they were to emulate the performance generated by the top 25 percent of firms. Several actions can help them get there, according to Mark Tennant, REL president.

• Implement a robust sales and demand planning process, if your firm doesn’t have one now. As Tennant points out, this process governs the way in which companies purchase, manufacture, and distribute materials. Over the past 12 to 18 months, many companies simply stopped ordering inventory, which helped to free up cash. To be sure, slashing inventory was the right move at the time for many firms. However, on its own it doesn’t help eliminate any lingering disconnects between sales, operations, and purchasing. “If companies haven’t invested in ensuring that they have the right process to effectively manage demand, it’s likely that their response to the recovering economy will be imprecise. They won’t be able to take advantage of opportunities,” Tennant says.

• Make sure all department heads understand the impact of their actions on the company’s cash flow. While receivables, payables, and inventory levels appear to have a direct link to working capital, their influence really is rather limited. Say sales decides to extend terms in order get new customers on board. There’s little AR can do to counteract that, Tennant points out. Similarly, purchasing may be under pressure to bargain for rock-bottom pricing with suppliers. To get there, they need to give in to suppliers’ demands for tight payment timelines. To truly affect cash flow, employees in all areas need to be measured against their impact on it.

• Apply an internal cost of capital at the business unit level. The cost of money shouldn’t be just the concern of corporate treasury, Tennant says. Rather, management in all areas should see how their use or release of funds impacts their own P&Ls. ###