An Analysis of Working Capital Management Results Across Industries Greg Filbeck. Schweser Study ProgramThomasM. Krueger.Universityof Wisconsin-La CrosseAbstractFirms are able to reduce financing costs and/or increase the funds available forexpansion by minimizing the amount of funds tied up in current assets. We provide insights into the performance of surveyed firms across key components of working capital management by using the CFO magazine s annual Working CapitalManagement Survey. We discover that significant differences exist between industries in working capital measures across time. In addition. we discover that these measures for working capital change significantly within industries across time. IntroductionThe importance of efficient working capital management is indisputable. Workingcapital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities). The objective of working capital management is to maintain the optimum balance of each of the working capital components. Business viability relies on the ability to effectively manage receivables. inventory. and payables. Firms are able to reduce financing costs and/or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. Much managerial effort is expended in bringing non-optimal levels of current assets and liabilities back toward optimal levels. An optimal level would be one in which a balance is achieved between risk and efficiency.A recent example of business attempting to maximize working capital management is the recurrent attention being given to the application of Six Sigma? methodology. Six Sigma? methodologies help companies measure and ensure quality in all areas of the enterprise. When used to identify and rectify discrepancies. inefficiencies and erroneous transactions in the financial supply chain. Six Sigma? reduces Days Sales Outstanding (DSO). accelerates the payment cycle. improves customer satisfaction and reduces the necessary amount and cost of working capitalneeds. There appear to be many success stories. including Jennifer Townes(2002)report of a 15 percent decrease in days that sales are outstanding. resulting in an increased cash flow of approximately $2 million at Thibodaux Regional MedicalCenter. Furthermore. bad debts declined from $3.4 million to $600.000. However. Waxer s (2003) study of multiple firms employing Six Sigma? finds that it is really a“get rich slow ”technique with a rate of return hovering in the 1.24.5 percent range.?Even in a businessusing Six Sigma methodologyan.“optimal level”of workingcapital management needs to be identified.Even in a business using Six Sigma? methodology. an“optimal”level ofworking capital management needs to be identified. Industry factors may impact firmcredit policy. inventory management. and bill-paying activities. Some firms may be better suited to minimize receivables and inventory. while others maximize payables.Another aspect of“optimal”is the extent to which poor financial results can be tied tosub-optimal performance. Fortunately. these issues are testable with data published byCFO magazine. which claims to be the source of“tools and information for thefinancial executive.”and are the subject of this research.In addition to providing mean and variance values for the working capitalmeasures and the overall metric. two issues will be addressed in this research. Oneresearch question is.“are firms within a particular industry clustered together atconsistent levels of working capital measures?”For instance. are firms in one industryable to quickly transfer sales into cash. while firms from another industry tend to have high sales levels for the particular level of inventory . The other research question is.“does working capital management performance for firms within a given industry change from year-to-year? ”The following section presents a brief literature review. Next. the research method is described. including some information about the annual Working Capital Management Survey published by CFO magazine. Findings are then presented and conclusions are drawn.Related LiteratureThe importance of working capital management is not new to the finance literature. Over twenty years ago. Largay and Stickney (1980) reported that the then-recent bankruptcy of W.T. Grant. a nationwide chain of department stores. should have been anticipated because the corporation had been running a deficit cash flow from operations for eight of the last ten years of its corporate life. As part of a study of the Fortune 500 s financial management practices. Gilbert and Reichert(1995) find that accounts receivable mana