A look at working capital and overall liquidity in the second quarter by The Hackett Group shows that operations have been heavily impacted by the coronavirus (COVID-19) pandemic.
The Q2 2020 US Working Capital Survey found that companies have experienced a 12-percent decline in revenue compared to the first quarter and a 14-percent decline in revenue year over year. The Survey also reported that debt levels have increased sharply, by 13 percent, while cash on hand increased by 47 percent.
Additionally, according to the survey, there have been decreases in gross margin (1.5-percent decline), EBIT margin (down 23 percent) and net income margin (61-percent decline).
The Q2 survey, the first midyear report of its kind conducted by The Hackett Group, a Miami-based business consultancy, also looked at the cash-conversion cycle, payables, inventory and receivables, and days payable outstanding (DPO) for 20 industries. Unsurprisingly, some industries fared worse than others.
Working capital. The cash-conversion cycle declined by 4.7 days to 40.7 days (a 13 percent decline) in the second quarter compared to the same period in 2019.
Receivables. Companies are collecting from their customers more slowly, with days sales outstanding (DSO) increasing by 7 percent to 47.4 days versus 44.3 days in Q2 2019. The first-quarter figure was 43.4 days.
Among the worst-performing industries for DSO:
- Airlines — 57.2 days in Q2, a 259-percent deterioration in DSO versus Q1 (16 days). The industry also had a 79-percent reduction in revenue and a 21-percent increase in debt.
- Hotels, restaurants and recreation — 100.1 days in Q2, a 178-percent deterioration in DSO from Q1 (36 days), along with a 45-percent reduction in revenue and flat accounts receivables.
Among the industries showing improvement:
- Construction materials — 51 days in Q2 versus 55 in Q1, a 7-percent improvement. The industry, which showed strong demand drives, also posted a 25-percent increase in revenue and 14-percent increase in accounts receivable.
- Food — 31 days in Q2 versus 33.2 days in Q1, a 7-percent improvement. Food also had a 1-percent increase in revenue and 5-percent decrease in accounts receivable.
Inventory. Companies are holding more inventory. Q2 days inventory outstanding (DIO) numbers increased by 15 percent year-over-year to 53.3 days (46.4 in Q2 2019). A sample of industries:
- Textiles, apparel and footwear — 246 days in Q2 versus 140 days in Q1, a 75-percent DIO deterioration.
- Energy, services and equipment — 55 days in Q2 versus 44 days in Q1, a 25-percent DIO deterioration.
Payables. Companies are paying suppliers more slowly, and days payable outstanding (DPO) has hit a 10-year high, The Hackett Group says. The Q2 2020 DPO number of 60 days is an increase of 10 percent from the previous year, and was also up from the first quarter (55.2 days). Industry examples:
- Metals and mining — 38 days in Q2 versus 46 days in Q1, a 17-percent deterioration in DPO. The industry also experienced a 16-percent decline in cost of goods sold and a 22 percent drop in accounts payable.
- Homebuilding — 20 days in Q2 versus 23 days in Q1, a 12-percent deterioration in DPO, along with a 10-percent increase in cost of goods sold, 12 percent revenue increase and a 11 percent drop in accounts payable.
- Textiles, apparel and footwear — 101 days in Q2 versus 58 days in Q1, a 75-percent improvement in DPO.