Here there are the rest of "don'ts" about working-capital management:
4. Don't tie receivables to payables.
The power balance in your supplier relationships may be very different from that of your customer relationships. Example: when a French small-appliance manufacturer introduced different terms of trade for each of its supplier and customer segments, it freed up capital of around €35 million, for a business with annual revenues of less than €450 million.
5. Don't manage by current and quick ratios.
Bankers use current and quick ratios in making credit decisions, and many companies consequently try to maximize those numbers. Example: a French consumer goods company proudly announced that its current ratio had risen from 110% to 200% and its quick ratio from 35% to 100%. The company declared insolvency six months later.
6. Don't benchmark competitors.
Managers become complacent when their working-capital metrics are in line with industry norms. Example: it was only when Michael Dell compared Dell Computer's working-capital management with retailers' rather than with other computer companies' that he realized what his company could potentially achieve.
4. Don't tie receivables to payables.
The power balance in your supplier relationships may be very different from that of your customer relationships. Example: when a French small-appliance manufacturer introduced different terms of trade for each of its supplier and customer segments, it freed up capital of around €35 million, for a business with annual revenues of less than €450 million.
5. Don't manage by current and quick ratios.
Bankers use current and quick ratios in making credit decisions, and many companies consequently try to maximize those numbers. Example: a French consumer goods company proudly announced that its current ratio had risen from 110% to 200% and its quick ratio from 35% to 100%. The company declared insolvency six months later.
6. Don't benchmark competitors.
Managers become complacent when their working-capital metrics are in line with industry norms. Example: it was only when Michael Dell compared Dell Computer's working-capital management with retailers' rather than with other computer companies' that he realized what his company could potentially achieve.
Source: hbr.org/may 2009/financial crisis spotlight
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