Capital shortage? With $1 trillion trapped in balance sheets, maybe not.

08Jul09

More from Booz & Company’s strategy+business:

“Companies that are not in financial services are sitting on as much as US$950 billion of excess working capital on their balance sheets, untapped and wasted, according to a Booz & Company analysis of North American stock exchange–listed businesses with annual revenue of more than $1 billion. All this potentially available cash is tied up in a vast array of receivables, payables, and inventory that is being neglected or that could be better handled.”

Example: “A leading consumer products maker had a cash position of about $290 million at the end of 2008. A closer look at the accounts suggests that a few deliberate measures — speeding accounts receivable from 69 to 55 days, constraining accounts payable from 48 to 56 days, and reducing inventory turns from 99 to 68 days — could improve this company’s cash position by $670 million, an increase of more than 130 percent. Those actions would move the company to the top quartile in its industry.”

The article goes on to suggest a list of specific tactics to free up this trapped cash.

These are stock exchange-listed companies with annual revenue in excess of $1 billion each, it’s a decent bet that they’re in relatively mature categories.  Some of the recaptured latent capital they’ll apply to their most pressing needs, and will likely allocate some to fund transformational initiatives to secure their futures.  But, since they haven’t had it available to date and really didn’t expect to have it, they may not be able productively to invest it internally, immediately.

Let’s qualify the ensuing paragraphs with my declaration that I have no background in finance, so if my logic is full of practical holes I’m prepared for wholesale flaming from knowledgeable readers.  With that, here goes…

What if enough companies achieved this net recapture that, after satisfying their internal investment needs, there remained a virtual pool of “found money?”  Might it be possible for someone to aggregate that into a fund to invest in emerging opportunities?

During the first dot.com boom, many industrial companies invested in startups and emerging companies.  Despite the broad-brush distaste many associate with the ensuing dot.bust, in 1999 the WSJ reported that Delta Airlines made more from those investments than from airline ops (no shock now, but newsworthy then).

If Booz is right, maybe there’s a way to ease some of the current liquidity squeeze for both old and new companies.

Your thoughts?

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