Midyear Changes to Working Capital Performance

Ongoing disruption has caused companies to optimize their working capital performance through such measures as improvements to inventory and days payable outstanding (DPO) performance.

As a result, a midyear update to The Hackett Group’s 2022 Working Capital Survey found that companies maintained inventory performance while payables performance fell compared to performance a year ago.

Midyear research from the Miami-based consultancy discovered that the companies surveyed — the nation’s 1,000 largest non-financial companies — seemingly had reached the limits of their ability to stretch payables terms with suppliers. During a second quarter characterized by inflationary pressures, supply chain disruption and geopolitical events, DPO dropped by 1.1 percent from 56.5 to 55.9 days. This appears to signal a shift in leverage toward sellers, The Hackett Group researchers indicated.

“This is the true definition of an inflection point, and a trend that is likely to continue,” said Shawn Townsend, the company’s director of transformation finance, in a press release. “Buyers have become more concerned with supply assurance and have had to become less prescriptive about how they receive goods and services.”

While supply chain financing remains popular, he said, “buyers are more focused on using it to stabilize and reinforce the supply base than to extend payment terms.”

Inventory performance, on the other hand, flattened. Days inventory outstanding (DIO) rose by just 0.1 percent and stands at 46.5 days, the report stated. Companies seemingly “built on the lessons learned during the pandemic,” The Hackett Group director István Bodó said in the press release. But as there is ongoing uncertainty, he added, “holding the line on inventory in this environment is actually a big win.”

Among other findings:

• The cash conversion cycle increased to 30.7 days from 30.1 days, a 2 percent difference, during the second quarter. The cash conversion cycle — also called the cash-to-cash cycle — measures the days between (1) the purchase of materials/inventory from a supplier and (2) payment collection for sale of the resulting product(s).
• Industries recording the largest cash conversion cycle improvement are airlines (204 percent), oil and gas (48 percent) and internet and catalog retail (42 percent). Those experiencing the greatest deterioration are food and staples retail (62 percent), railroads and trucking (60 percent), and computer hardware and peripherals (53 percent).
• Cash on hand as a percentage of revenue decreased by nearly 30 percent from a year earlier, reaching 8 percent and returning to levels seen before the coronavirus pandemic. “Combined with the decrease in total debt, this indicates companies continue to use cash hoarded during the pandemic to clean up operational performance and pay off debt in anticipation of further interest rate hikes,” the report states.

To succeed amid ongoing disruption, companies need “discipline, planning and foresight when it comes to working capital management,” Townsend said. Companies must be able to not only recognize but respond to changing demand signals, he said. Additionally, he said, they should review their credit and collections management processes and payment terms as well as improve supplier management and underscore contingency planning.

Smart business leaders, Bodó said, “will double down on capabilities for managing working capital health — increasing their visibility into key indicators, sharing information better across functions and automating processes — to enable agility amid continuing change.”

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