Working Capital Management (WCM) is a funny creature that few companies really get their arms around. This is especially true for public companies. From my experience entrepreneur driven companies have a much better control and focus on cash and cash drivers. There it is a necessity to gear the company towards cash generation instead of earning figures forced on to public companies by the analysts.
In public companies where most KPI are built on EPS and EBITDA there is often a hard struggle to implement WCM. Since the organization is not educated on the impact on cash treasury usually is the only function understanding the difference between accounting cash and bank account cash. Therefore giving the treasury the responsibility to implement WCM in an EPS run corporate is like asking treasury to wag the dog.
1 comments:
Hi Magnus,
This is very true. At its core, it is the Principal-Agent problem. For entrepreneur driven companies, Principal is on top of Agent and focus is rightly placed at generation and control of cash. For public companies, Principal–Agent accountability is rather loose. Management has all incentives to sugar coat their performance with easily manipulable Earning Indicators.
I would think,
• We could have Treasuries more independent of Management, so it is empowered to wag the dog.
• And analysts could play a role here by having due focus on company’s cash performance as well. What do they gain? They don’t go wrong again with Enrons and Sunbeams.
Best Regards,
Sandeep.
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