Improving Cash Management and Agility

By Sue Doerfler

Revenues have increased, inventories are growing and working capital performance has improved as U.S. companies continue to wrestle with coronavirus pandemic-induced disruption. But according to the 2021 Hackett 1000: Q3 Update by business advisory consultancy The Hackett Group, significant opportunities still remain for U.S. businesses.

The report, which surveyed 908 U.S. companies and provides analysis of cash and working capital performance during the first nine months of 2021 as compared to end-of-year 2020, found that the cash-conversion cycle declined by 10 percent to 29.9 days (versus 34.4 days at the end of 2020). But opportunities exist to further boost liquidity and agility to drive improvements in inventory, payables and receivables by releasing nearly US$1.3 trillion tied up in excess working capital, it states.

According to the report, companies experienced a 14-percent increase in revenue. Twenty-eight of the 38 industries surveyed for the report experienced growth, with top performers including airlines and oil and gas, which experienced more than 25-percent growth. Revenue decreases occurred in such industries as motor vehicles and auto parts, telecommunications, and internet retail.

“Revenue growth appears to be directly influenced by aspects of the post-(COVID-19) recovery,” the report states. It notes that (1) price increases are fueling growth in some areas, such as lumber and steel, (2) consumer consumption often exceeds supply for such items as household goods and (3) leisure travel is helping to pick up the travel industry.

Inventories grew 11 percent over the first nine months of 2021, while days inventory outstanding (DIO) remained steady at 44.3 days (versus 44.4 days at the end of 2020. As a comparison, DIO was 53.3 days in the second quarter of 2020.) According to the report: “Rising material costs, product availability and changing consumer demand all had an impact on inventory performance by industry.”

Some industries fared better than others. DIO increased in such industries as motor vehicles and auto parts that were impacted by material shortages and supply chain constraints, like port congestion. DIO decreases occurred in oil and gas, marine shipping, hotels and airlines, among others. The Hackett Group notes that improvements can largely be attributed to external factors, not targeted inventory rebalancing initiatives.

Among other findings:

Cash. Cash decreased 1 percent as companies experienced increases in (1) capital expenditures, including investment in infrastructure, (2) operating cash flows, in part due to stock repurchases, and (3) debt prepayment, the report found. M&A activities also affected cash on hand. Debt also decreased by 1 percent.

Receivables. Companies are collecting from their customers a bit more quickly, with days sales outstanding (DSO) decreasing 3 percent to 43.1 days versus 44.4 days.

Payables. To improve cash flow, companies took longer to pay suppliers: Days payables outstanding (DPO) improved 4 percent, from 55.4 days to 57.6 days (the Q2 2020 DPO was 60 days).

In the report, The Hackett Group offers numerous recommendations on improving liquidity and agility in three areas: inventory, accounts receivable and accounts payable. Strategies include:

  • Assure cash isn’t invested in the wrong inventory. Companies should analyze demand spikes and supply limitations as well as incorporate cost and margin criteria when making stockkeeping unit/product prioritization decisions.
  • Review processes, like credit risk evaluation and monitoring and payment collection. Take the needed steps to balance risk and sales, reduce potential bad debt and unbilled receivables and strengthen timely payments.
  • Analyze supplier risks and payment performance. Look for ways to further optimize payment terms.
(Photo credit: Getty Images/Andrew Brookes)

About the Author

Sue Doerfler

About the Author

As Senior Writer for Inside Supply Management® magazine, I cover topics, trends and issues relating to supply chain management.