US companies made only marginal improvements in their ability to collect from customers and pay suppliers in 2013, while showing no improvement in how well they managed inventory, according to REL research.
The working capital specialist, a division of The Hackett Group, recently reported that
an increased focus on working capital was proving successful for European companies
. However, REL’s 16th annual working capital survey finds that in the face of slow growth, shrinking margins, and low interest rates, few American companies are focused on optimising their collections, payables and inventory,
Research jointly conducted by REL and
magazine found that the amount tied up in excess working capital at nearly 1,000 of the largest US public companies is over US$1 trillion.
With the US economy slow but stable, gross domestic product (GDP) increased by 3.2% in 2013. At at the same time, the research found that gross margins decreased by 0.3%, indicating that US companies are spending more internally to generate revenue.
The research also found that American companies are continuing to borrow, using low interest rates to improve their cash position, with cash on hand increasing by 12%, or US$110bn. At the same time companies continued to ramp up capital expenditures, which have risen by 43% over the past three years.
The value of total net working capital (NWC) rose by 3.2% in 2013, and days working capital (DWC) improved by less than 1%. While days sales outstanding and days payable outstanding (DSO/DPO) improved only slightly, days inventory on hand (DOH) showed no change at all.
Cash conversion efficiency – the time companies take to convert sales into cash – improved in 2013 after two years of declines. In addition, free cash flow – a key indicator of the health of corporate cash flows, representing the cash companies are able to generate after laying out money to maintain or expand their asset base – improved dramatically, rising by 23% over the previous year, indicating an improvement in cash flow management.
Still a Low Priority
“The good news is that US companies aren’t getting any worse at managing their working capital,” said Analisa DeHaro, associate principal for REL. “In fact, the number of companies that improved working capital performance for three years in a row increased significantly in 2013.
“But for most companies, working capital remains a low priority. With easy access to low interest cash there’s little motivation for companies to deal with complex issues like how to collect from customers faster without alienating them, what can be done to optimise payments to suppliers, or how to maintain just the right inventory levels given today’s complex supply chains.
“But there are tremendous opportunities here, and with slow growth and shrinking margins, plus interest rates that are certain to rise, companies that focus in these three areas can drive real bottom-line benefit, today and in the future.”
The US$1 trillion-plus that the largest US public companies still have in excess working capital represents the gap between top-quartile working capital performers and typical companies. It also represents about a third of the gross working capital held by these companies, and is equal to nearly 6% of US gross domestic product (GDP). Excess inventory represents the largest share of the working capital management gap, at US$423bn.
Top performers in the REL/CFO analysis operate with about half the working capital of typical companies. They collect from customers in just over three weeks, more than three weeks faster than typical companies. They also take about 36 days to pay suppliers, over 10 days longer than typical companies. Finally, they hold just over two weeks of inventory, less than half that of typical companies.
Sustainability of working capital improvements continues to be an issue, with less than 10% of the US companies in the study showing working capital improvements for three years in a row. But the number of companies showing consistent improvement in working capital has now grown for two consecutive years, a promising trend.
The research identified the industries where US companies have shown the most improvement in working capital in 2013. Companies in the wireless telecommunications industry led the most improved list with a 14% improvement, followed by road and rail companies (12%), car components (11%), and food products (10%).
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