It's impossible to overstate the depth of disruption in today's financial markets -- and its severe impact on access to capital. Rising short-term borrowing rates coupled with tightening credit markets have made the quest for cash a modern-day crusade inside most finance departments.

The rise in the TED spread, which represents the difference in Treasury bill rates and the interest rates on interbank loans, indicates how dramatically liquidity is being withdrawn from the market as banks demand a greater premium for access to cash. Although it has stabilized since its high last fall, the spread remains far above historical levels.

Meanwhile, commercial paper, a popular short-term debt instrument issued by companies to finance working capital, also took a major hit. Investors, such as money market mutual funds, moved to treasury and other government guaranteed investments and away from short-term debt issued by companies.

On top of all this, raising capital through alternate means is sending many finance executives on ill-fated sojourns, when their attention and focus might be better spent closer to home. Companies are finding it almost impossible to establish new credit relationships, even as they have to operate under tighter debt-to-equity ratios and restrictions on the use of capital, as well as more stringent reporting requirements.

All of which makes it all the more surprising that so many companies have all but ignored one accessible source of cash: working capital.

The Sword in the Stone

We examined the inventory performance of 70 top manufacturers and found that cash tied up in inventory has grown steadily over the past four years (3.4 percent CAGR). Even before the spike when the economy slowed in late 2008, inventory had been on the rise for these companies over the previous three years (1.6 percent CAGR).

Lackluster working capital performance should come as no surprise. For decades, access to cash has been relatively inexpensive. As a result, the underlying processes that companies have hardwired into their organizations to manage working capital have not received the fine-tuning they routinely require. Shortcomings in processes such as demand forecasting, inventory management, credit, and collections have been largely tolerated, helping obscure working capital's vast potential.

Now that cash has become a scarce and expensive commodity, unlocking these underlying working capital capabilities could release significant amounts of cash. Can new working capital best practices break the spell?

In a word, yes. Working capital improvements can be a fast and sure way to free up cash when you're up against the wall. Companies that focus on working capital improvements in a disciplined way often generate significant benefits. One company I work with was able to free up $500 million in cash by reducing the inventory required to run its supply chain by more than 30 percent -- even while improving customer service. Another saw a similar cash flow benefit by focusing on AP. Both companies targeted improvements in the underlying capabilities that drive working capital performance.

Why don't other companies see similar results? Some companies tend to focus on temporary fixes, such as cutting production, without going after the underlying drivers in a systematic way. These companies may see quarter-end and year-end benefits, but the improvements are not sustainable. And they often come at the expense of poor customer service.

Other companies assume that improvements to working capital are costly, so they drag their feet. They say that they've already done what they can do to improve working capital and believe that the costs of additional improvements are too high in terms of customer dissatisfaction and relationships with suppliers. This is not necessarily true. Short-term actions can often result in big gains in working capital, with no new technology investments and little risk to customers or suppliers.