Free The Balanced Scorecard: Translating Strategy Into Action by Robert S. Kaplan, David P. Norton Page B

return-on-investment, and economic value-added, provide overall outcome measures of the success of financial strategies to increase revenues, reduce costs, and increase asset utilization. Companies may also wish to identify the specific drivers they will use to increase asset intensity.
Cash-to-Cash Cycle
    Working capital, especially accounts receivable, inventory, and accounts payable, is an important element of capital for many manufacturing, retail, wholesale, and distribution companies. One measure of the efficiency of working capital management is the cash-to-cash cycle, measured as the sum of days cost-of-sales in inventory, days sales in accounts receivable, less days purchases in accounts payable (see Figure 3-2). The theory behind this measure is simple. The company purchases materials or products (and, for manufacturing companies, pays labor and conversion costs to produce finished goods). The length of time from when the purchases are made until they are sold represents the length of time capital is tied up in inventory. From this can be subtracted the length of time from purchasing materials and labor and conversion resources until cash payment must be made (the days purchases in accounts payable). The days sales in accounts receivable measures the length of time from when a sale is made until cash for it is received from customers. Thus the cash-to-cash cycle represents the time required for the company to convert cash payments to suppliers of inputs to cash receipts from customers. Some companies operate with negative cash-to-cash cycles; they pay suppliers after receiving cash from customers. In effect, by matching inventories extremely closely to final sales, collecting quickly from customers, and negotiating favorable terms with suppliers, they are able to supply, not consume, capital from their day-to-day operating cycle. While many companies will find it difficult, if not impossible, to have zero or negative cash-to-cash cycles, the goal of reducing the cash cycle from current levels can be an excellent target for improving working capital efficiency.
    Figure 3-2
Cash-to-Cash Cycle
    Companies with long operating cycles, such as construction companies, find it equally important to manage working capital. Such companies need to track progress payments against cash expended for work completed to date. Rockwater, the undersea construction company, had a particular problem with accounts receivable. It often had to wait more than 100 days before the customer made its final project payment. One of Rockwater’s principal financial objectives was to significantly reduce the length of this closeout cycle, an objective that, if reached, would produce a dramatic improvement for its return-on-capital-employed, another one of its financial objectives. 6
Improve Asset Utilization
    Other measures of asset utilization may focus on improving capital investment procedures, both to improve the productivity from capital investment projects and accelerate the capital investment process so that the cash returns from these investments are realized earlier; in effect, a reduction in the cash-to-cash cycle for investments in physical and intellectual capital.
    Many of an organization’s resources supply the infrastructure for accomplishing work: designing, producing, selling, and processing. These resources may require considerable capital investments. The investments certainly include physical capital, such as information systems, specialized equipment, distribution facilities, and other buildings and physical facilities. But the investments also include intellectual and human capital, such as skilled technologists, data bases, and market-and customer-knowledgeable personnel. Companies can increase the leverage from these infrastructure investments by sharing them across multiple business units. Apart from the potential revenue benefits from sharing knowledge and customers, cost reductions can be achieved by not replicating