Industryweek 3197 Financepromo
Industryweek 3197 Financepromo
Industryweek 3197 Financepromo
Industryweek 3197 Financepromo
Industryweek 3197 Financepromo

Finance: When It Comes to Year-End Cash Management, It's All in the Game

Nov. 14, 2012
Short-term gains to improve Q4 financials typically are negated in the following quarter.

Turns out politicians aren't the only ones adept at manipulating reality to paint themselves in as favorable a light as possible. Manufacturers and other large U.S. companies have learned how to "game the system" to make their year-end results look good, even at the risk of dooming their subsequent first-quarter numbers.

"Rather than develop a strategy to drive sustainable working-capital improvements, these companies play the same games each year, trying to pretty up their balance sheets to impress analysts and investors," says Prathima Iddamsetty, senior manager with REL, a consulting firm specializing in cash management solutions. "But like a rubber band stretched too far, they snap right back, and by the end of Q1 these companies are worse off than when they started. Their bad business practices may make them look good in the short-term, but they have a negative impact on the long-term bottom line."

See Also: Manufacturing Industry Finance News & Trends

Some of the tricks these companies use include deep customer discounts; extended payment terms; manipulating receivables, payables and inventory; and the old reliable "the check is in the mail" response to suppliers to avoid paying them until after the year-end close. And these are hardly rare occurrences; based on REL's study of nearly 1,000 public companies, roughly half of these companies engage in at least one of these gamesmanship tactics.

The reason companies play these games is both obvious and measurable: Working-capital performance improved by 10% in Q4 2011, or an average of $111 million per company. The reason why they should stop playing these games, though, should be equally obvious: Their Q1 2012 performance decreased by 11%, or an average of $113 million per company. So all of the short-term gains not only vanished the following quarter, but the companies actually ended up in worse financial shape.

How can companies break this endless cycle of gamesmanship? REL recommends several strategies:

  • Just say no. Senior executives need to set a policy that discourages these short-term tactics, and authorize an audit committee to monitor internal practices.
  • Institute a year-round process. Companies should manage working capital on a continuous basis, not just at the end of every quarter.
  • Incentivize on the basis of profitability, not just revenue. The basic idea is to get everybody in the company thinking about the long-term consequences of their actions.
  • Set rolling targets. Companies should encourage continuous and sustainable improvements, to get away from the "short-term fix" mentality.

Popular Sponsored Recommendations

Empowering the Modern Workforce: The Power of Connected Worker Technologies

March 1, 2024
Explore real-world strategies to boost worker safety, collaboration, training, and productivity in manufacturing. Emphasizing Industry 4.0, we'll discuss digitalization and automation...

3 Best Practices to Create a Product-Centric Competitive Advantage with PRO.FILE PLM

Jan. 25, 2024
Gain insight on best practices and strategies you need to accelerate engineering change management and reduce time to market. Register now for your opportunity to accelerate your...

Transformative Capabilities for XaaS Models in Manufacturing

Feb. 14, 2024
The manufacturing sector is undergoing a pivotal shift toward "servitization," or enhancing product offerings with services and embracing a subscription model. This transition...

Shifting Your Business from Products to Service-Based Business Models: Generating Predictable Revenues

Oct. 27, 2023
Executive summary on a recent IndustryWeek-hosted webinar sponsored by SAP

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!