Working Capital Trends See Decline in Performance

After years of extending payments with suppliers, organizations are having a harder time doing so, according to research from The Hackett Group.

The Miami-based business consultancy’s annual Working Capital Study found that in 2022, the decline in payables performance overshadowed small improvements made in receivables and inventory, resulting in a 3-percent decrease in overall working capital performance. 

According to the report, which queried 1,000 of the U.S.’s largest public companies, organizations are paying bills more quickly: There was an 8-percent decline in days payable outstanding (DPO), which translates to a decrease of nearly five days in the average length of time it takes them to pay suppliers. This led to a variety of other dynamics, including that the cash conversion cycle (CCC) — how long it takes for a company to convert what it has in inventory into cash — increased by 1.2 days.

On the brighter side — and despite such disruption as high interest rates, inflation and geopolitical turmoil like the Russia-Ukraine war — survey respondents said they expect continued, albeit moderate, revenue growth. In 2022, their revenue grew by 15.3 percent to US$15.8 trillion from $13.7 trillion the year before. Industries driving the revenue hike included airlines, oil and gas, and wholesale distributors.

However, in 2021, there was what The Hackett Group calls a “triple crown event,” where all three working capital management metrics — receivables, payables and inventory — improved.

 “After the ‘great working capital reset’ of 2021, (last year was about) course correction and growth, despite significant challenges in the business environment,” The Hackett Group director Shawn Townsend said in a press release.

Companies appear to have reached an inflection point in their ability to improve their balance sheet by extending payments to suppliers, he said. “For a decade or more, this practice has been the easiest way for companies to improve their working capital performance, and companies have heavily relied on it,” Townsend said. “But now, supply assurance is a bigger challenge than ever for most companies, with many facing issues related to supplier criticality, competition for resources and the availability of supply.”

The Hackett Group researchers expect the trend of worsening payables performance to continue in 2023, Townsend said, “especially as the restructuring of several major regional banks will likely lead to less availability of supply chain finance assets. In addition, the new accounting disclosure rules introduced by the Financial Accounting Standards Board (FASB) requiring companies to disclose information about their supply chain finance programs has softened the demand for such tools.”

The working capital performance gap between typical companies and top performers continues to widen, The Hackett Group director István Bodó said in the press release, “driven by the degradation of the median performers rather than the improvement of the top performers as seen in previous years. The ratio of top-to-median performance usually traded at an average of (about) 2.95 in the last few years has now widened by 10 percent to reach 3.30.”

 Among The Hackett Group’s other findings:

• Cost of goods sold (COGS) as a percentage of revenue rose 2 percent to 64 percent. The increase is “below the annual U.S. inflation rate of 6.5 percent, which indicates that companies successfully managed costs despite the mounting inflationary pressure,” the report stated.
• Receivables (days sales outstanding, or DSO) improved by 5 percent, driven largely by demand for consumer durables, recreational products, airlines, and oil and gas.
• Inventory levels (days inventory outstanding, or DIO) improved by 3 percent. Strong demand as well as lessons learned during the coronavirus pandemic — developing a more strategic approach — contributed to the improvement.
• Surveyed companies have nearly $1.9 trillion tied up in excess working capital. This includes $666 billion in excess inventory, $665 billion in payables and $531 billion in receivables.

“With higher interest rates, persistent inflation, continued market unpredictability and many of the other major challenges companies are facing, companies must focus on optimizing working capital if they are to remain competitive long term,” Bodó said. “Cash flow management should be a top priority on the corporate agenda to provide liquidity for strategic investments.”

(Photo credit: Getty Images/Marco Bottigelli)