Combined Performance of Collections,
Payables & Inventory At Lowest Level since 2008 Financial
Crisis; Improvement Opportunity at Large U.S. Cos Now Tops $1
Trillion
The largest public companies in the U.S. chose to go even
further into debt in 2015 instead of driving cash out of their
businesses by improving how they collect from customers, pay
suppliers, and manage inventory, according to the new annual
working capital survey from REL, a division of The Hackett Group,
Inc. (NASDAQ: HCKT). Overall working capital performance continued
to degrade, reaching poorest performance levels since the 2008
financial crisis.
A significant factor in this year’s overall results was low oil
prices, which caused oil and gas companies to increase reserves,
dramatically worsening both their inventory and overall working
capital performance, and dragging down the performance of the
entire survey group.
The survey is featured in the July issue of CFO Magazine. A
complimentary analysis of the survey results is available, with
registration at this link: http://bit.ly/29GTF8R.
The survey looks at the performance of 1,000 of the largest
public companies in the U.S. during 2015. It saw corporate debt
rise significantly for the seventh consecutive year, as a result of
low interest rates. Debt was up 9.3 percent this year, or $413
billion. Since 2009 the total debt position of the companies in the
survey has increased by over 58 percent.
Working capital performance – which includes collections,
payables, and inventory -- worsened somewhat, with a deterioration
of 2.4 days or 7 percent in Cash Conversion Cycle (CCC), or the
ability of companies to turn spending on overhead, raw materials,
and labor into cash. It is now at 35.6 days, the worst since before
the 2008 financial crisis. CCC is a key measure of working capital
performance which factors in how efficient companies are at
managing inventory, receivables, and payables.
The working capital improvement opportunity of companies in the
survey is now over $1 trillion, or 6 percent of the U.S. GDP. By
component the improvement opportunity is: $421B in inventory, $316B
in receivables and $ 334B in payables. This opportunity represents
the amount of working capital improvement that could be achieved if
all companies reached the working capital performance of top
quartile performers in their individual industry.
Top performers in REL 1000 (companies in the upper quartile in
their industry) are now seven times faster at converting working
capital into cash than the typical companies. These companies
collect from customers more than two weeks faster, pay suppliers
more than two weeks slower, and hold less than half the
inventory.
A significant factor in the overall working capital performance
of the largest U.S. companies was low oil prices, which drove oil
& gas companies to increase reserves. This caused a dramatic
worsening of inventory performance among these companies, which
make up nearly 10 percent of the overall survey group by revenue.
As a result, the oil and gas industry saw its Cash Conversion Cycle
(CCC) worsen by nearly 170 percent in 2015, shifting from 4 to 11
days.
“Once again, low interest rates gave companies a perfect excuse
to ignore the hard work of optimizing receivables, payables, and
inventory, leaving over a trillion dollars unnecessarily tied up in
operations. Instead of focusing on transformation most simply
leveraged their future with more loans,” said The Hackett Group
Senior Director Craig Bailey.
“At the same time, weak oil prices impacted inventory
performance at oil and gas companies. The West Coast port strike,
which ended in early 2015, was probably also a contributing factor
to this year’s results, as it caused goods to pile up in
warehouses. Companies took much of last year burning off those
inventories,” said Mr. Bailey.
According to The Hackett Group Director Ben Michael,
“Eventually, interest rates will rise again, and there are signs
this may happen soon. Then many companies may find themselves in
dire straits, after seven years of growing debt and worsening
working capital performance. Smart companies are getting out ahead
of the curve now, and starting making the changes they need to
squeeze unnecessary cash out of these key areas.”
In the entire survey group, inventory performance worsened
significantly, and was the largest factor in the overall working
capital deterioration. Days Inventory Outstanding increased by over
10 percent, and rose to over 49 days. Days Sales Outstanding
(collections) worsened by only 1.1 percent, and Days Payables
Outstanding (payables) improved by over 5 percent.
Few companies have been able to sustain working capital
improvements, the survey found. Only 2 percent of the companies in
the study improved CCC for five years running. Only four improved
CCC every year during the past seven years (Goodyear, Priceline,
Kimberly-Clark, and AmerisourceBergen).
The REL/CFO Working Capital Survey is the only one of its type
that publishes comprehensive performance information on working
capital and a comprehensive array of underlying metrics for 1,000
of the largest companies in the U.S. A similar annual study from
REL looks at performance of the largest public companies in Europe.
The survey relies in part on certain aggregated public data from
FactSet.
About REL
REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a
world-leading consulting firm dedicated to delivering sustainable
cash flow improvement from working capital and across business
operations. REL’s tailored working capital management solutions
balance client trade-offs between working capital, operating costs,
service performance and risk. REL’s expertise has helped clients
free up billions of dollars in cash, creating the financial freedom
to fund acquisitions, product development, debt reduction and share
buy-back programs. In-depth process expertise, analytical rigor,
and collaborative client relationships enable REL to deliver an
exceptional return on investment in a short timeframe. REL has
delivered work in over 60 countries for Fortune 500 and global
Fortune 500 companies.
More information on REL is available: by phone at (770)
225-3600; by e-mail at info@relconsultancy.com; or on the Web at
www.relconsultancy.com.
About The Hackett Group
The Hackett Group (NASDAQ: HCKT) is an intellectual
property-based strategic consultancy and leading enterprise
benchmarking and best practices implementation firm to global
companies. Services include business transformation, enterprise
performance management, working capital management, and global
business services. The Hackett Group also provides dedicated
expertise in business strategy, operations, finance, human capital
management, strategic sourcing, procurement, and information
technology, including its award-winning Oracle EPM and SAP
practices.
The Hackett Group has completed more than 11,000 benchmarking
studies with major corporations and government agencies, including
93% of the Dow Jones Industrials, 86% of the Fortune 100, 87% of
the DAX 30 and 52% of the FTSE 100. These studies drive its Best
Practice Intelligence Center™ which includes the firm's
benchmarking metrics, best practices repository, and best practice
configuration guides and process flows, which enable The Hackett
Group’s clients and partners to achieve world-class
performance.
More information on The Hackett Group is available at:
www.thehackettgroup.com, info@thehackettgroup.com, or by calling
(770) 225-3600.
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version on businesswire.com: http://www.businesswire.com/news/home/20160728005153/en/
The Hackett Group, Inc.Gary Baker, 917-796-2391Global
Communications Directorgbaker@thehackettgroup.com
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