Tough economic times are forcing companies both large and small to look closely at their cash and working capital management. But what works for large businesses may not always help smaller ones, and vice versa.

Even taking into account the challenges with any sort of “one size fits all” approach, close examination of practices across the size divide is worthwhile. For one thing, companies of any size can, in fact, turn up some valuable practices that may be copied. What’s more, all companies can benefit by understanding the needs and approaches of their customers and suppliers, no matter their difference in scale.

Emulate Small-Company Efficiency

In the management of cash and working capital, large companies certainly can learn a thing or two from smaller enterprises. For instance: Use capital assets more efficiently.

In a smaller company, large-capital items such as a crane, bulldozer, or warehouse demand a critical focus. Often, a single piece of capital equipment represents the company’s single largest expense and would tend to be employed with great efficiency. When not in use, the small-business owner asks “why not?”—and then either finds a way to benefit from the item, perhaps renting it out or arranging for its disposal.

In a larger firm, even the largest capital assets are often underutilized amid so many capital assets and so many commercial concerns. By taking the perspective of a small-business owner toward capital, big companies can improve their efficiency.

Another advantage smaller businesses have is that it is easier for them to get the associates to rally around a common cause than it is a larger, more complex organization, so the smaller firms can see and adjust to situations much quicker than the larger ones.

Collect Like the Big Guys

Late payments are a challenge for any size business—even in the best periods. In fact, days sales outstanding (DSO) increased by 11 percent in 2009 compared with 2008. In times like these, when the economy remains shaky and many companies struggle to find and keep customers, it’s not much of a stretch to imagine a business owner waiting by the mailbox for checks to come in.

To help get those payments made, small companies can learn from the way big firms handle late payments. Small companies tend to contact customers only 15 days or more after a payment is due, while larger companies prompt customers much sooner. One lesson is to segment their customers based upon their size and their historical payment performance and determine which segment improvement will yield the greatest benefits. This isn’t always what you might think. For example, improving all customers in the 15-to-30-day delinquent bucket by a few days typically delivers better cash results than reducing the over-60-day buckets by 50 percent.

Large companies are also sticklers for creating clear and accurate invoices. In a down economy, counterparties are more likely to seize on any excuse to delay payments. Thus, large companies work hard to create easy-to-understand invoices. They also build checks and balances into invoicing processes for greater accuracy. The lesson for smaller companies: Make sure invoices are clear and correct before sending them because pricing of the product or services is the No. 1 issue that causes a dispute with customers.

The Learning Goes Both Ways

Copying best practices is only part of the story of how best to manage capital assets. Achieving a deeper insight into how the supply chain works is another. By seeking to understand the practices and needs of other businesses, both small and large companies can work toward more favorable commercial terms across an entire value chain.

Take the case of a large company facing weak demand for its products. Such a company will often announce that it means to stretch its payments to a smaller supplier—from 30 or 60 days to 90 days or more. Unless the supplier’s product or service is in high demand, there is often a sense that any terms dictated must simply be accepted.

However, by understanding the principal goal of that larger, more-dominant player in the relationship, it may be possible for this supplier to negotiate a more favorable outcome. It is not the buyer’s goal to harm the seller. All the buyer really hopes to do is slow its own payables and thus reduce strain on its own working capital.

With this in mind, a seller may be able to offer an alternative solution—for instance, offering five or 10 days of on-site or “consignment” inventory at no cost to the buyer. Such an arrangement would enable the buyer to reduce its own “safety stock”—excess inventory held “just in case”—thereby reducing the buyer’s working capital by alternative means.

For the supplier, offering consignment inventory can be more attractive than accepting slower payments. One benefit: additional days sales of inventory (DSIs) are less expensive than DSOs because sales include profit margin. In another plus for the supplier, providing five or 10 days of inventory will tend to lock the customer into the relationship.

Consignment also gives the seller a cleaner line of sight into the buyer’s demand processes. This vantage point can help drive operating efficiencies internally as well as further down the supply chain. This is but one example of how a small company can leverage insight into big company needs to forge strategies that benefit both sides.

Think Longer Term

Regardless of the size of the firm, companies should consider how their actions may affect counterparties. Squeezing suppliers or shortchanging customers may pay off in the short term, but there are risks. Customers whose credit isn’t accepted or whose payment terms are tightened will not only buy less today, they will also likely remember how they were treated and be more apt to change providers when the opportunity arises.

As for suppliers, demanding stricter commercial terms such as lower prices and/or higher service levels from them can lead to financial duress. This may, in turn, lead to lapses in quality, stalled deliveries, and, for the buyer, a failure to deliver on promises to its own customers.

In contrast, taking a closer look at each others' needs and practices improves the odds that companies both large and small will find ways to strengthen their commercial relationships as well as improve their own working-capital profiles. Both goals are paramount in today’s challenging economic times.

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Stephen M. Payne, Americas Leader for Working Capital Advisory Services at Ernst & Young LLP, has 23 years of experience in operations management and consulting. He worked in industry as an industrial engineer, operations director and SVP of operations/supply chain as well as 18 years of consulting focused on working capital improvement. Prior to joining E&Y to head up the Working Capital Advisory Services practice for the Americas, Payne was the CEO of a global firm that specialized in helping companies improve cash flow from working capital via operational improvement, covering all aspects of operating working capital, inventory, payables and receivables.