Working capital dashboard: a tumultuous year

Lack of revenue, reduced or redirected customer demand, liquidity pressures, debt collection headaches – on the working capital front, 2020 has put financial services to the test. What is the overall performance of the largest American companies?

Many, especially those with influence in the market, have improved their working capital and have remained very liquid. Yet for others, an economy disrupted by a pandemic meant too much capital tied up in day-to-day business operations.

The cash conversion cycle (CCC) for the top 1,000 companies increased to 33.7 days in 2020 from 33.1 in 2019, according to the annual report CFO/ The Hackett Group Working Capital Dashboard.

The cash conversion cycle reflects the efficiency with which companies convert resources into cash. (The equation is the number of overdue sales days plus overdue inventory days minus overdue debt days.)

The surprise is that CCC didn’t get any worse than that, given poor inventory management and slower overall debt collection. These two components of the CCC have deteriorated.

Companies that have kept overall working capital measures almost stable have done so by lengthening payment terms to suppliers. This tactic seems to be getting more popular every year from the scoreboard. The problem is, this puts financial pressure on the suppliers of these companies.

For the 1,000 U.S. businesses in the survey, days to pay (DPO, the number of days businesses take to pay their suppliers) increased 7.6% to a record high of 62.2 days, compared with 57.8 days in 2019. It was the biggest one-year jump in five years.

While some organizations like those in the pharmaceutical and internet services and software industries have supported their vendors due to their own favorable cash positions, declining revenues in many industries have pushed the DPO to the limit, says Craig Bailey, Associate Director, Strategy and Business Transformation at The Hackett. Group.

According to Bailey: “Some companies that had cash on their books kept conditions or even gave their suppliers [more] favorable conditions, but those who were in a precarious cash situation kept suppliers waiting. [The] hospitality [industry] had no incoming income, for example. All retail companies, especially textiles, clothing and footwear, have also tried to conserve cash. “

Meanwhile, those same revenue-strapped companies were making a concerted effort to withdraw money, he says. “On the DSO side, companies were chasing overdue accounts receivable where they could, and we saw everyone at the pumps there. “

However, the overall DSO deteriorated 3.8%, to 41.5 days, another all-time high for the survey. In 34 out of 50 industries, companies saw their DSO performance drop. Accounts receivable and DSO were also affected by declining revenues in traditional sectors such as airlines, automotive parts and aftermarket, hotels and recreation, and consumer durables.

However, lockdowns and business closures have resulted in DSO gains in some emerging industries like the internet and catalog retailing. The increase in subscription services and business-to-consumer sales channels in these industries has allowed them to increase revenue while maintaining DSO performance. (See the table, “Cash Sales.”)

Meanwhile, product turnover has plummeted, forcing companies to hold inventory longer and increasing the total number of inventory days (DIO) by 7.1%, to 54.4 days.

Disrupted demand and unsold products pushed inventory to higher levels. Pandemic-related facility and business closures resulted in reduced demand, supply chain disruption, and seasonal change as demand rebounded. Some companies have responded by consolidating their offerings or otherwise simplifying their product line.

But inventory optimization issues will likely continue into 20201. This part of working capital has always been difficult for businesses to optimize, and the effects of the pandemic still cloud the picture of demand in some markets.

Winners and losers

While the overall scorecard numbers weren’t impressive, there were some winners in terms of working capital efficiency. The top performers in working capital converted cash three times faster by deferring payments by roughly 76 days compared to 49 days in mid-performing companies. At the same time, they raised money 41% faster – in 29 days vs. 49 days, and held inventory less than half the time – 29 days vs. 62 days.

Shifts in demand due to the pandemic markedly improved working capital in areas that catered to consumers staying at home, increasing income, reducing inventory and improving CCC.

Shifts in demand due to the pandemic markedly improved working capital in areas that catered to consumers staying at home, increasing income, reducing inventory and improving CCC. Beneficiary sectors included household and personal care providers (113% improvement in CCC year-over-year), media (106% improvement), and Internet and catalog retailing (65% improvement). %).

Unsurprisingly, on the opposite end of the spectrum, the pandemic has been particularly damaging to sectors dependent on travel and for those who relied on well-functioning supply chains. For example, in 2020, airlines saw a 903% year-over-year deterioration in CCC. CCC fell 47% in hotels and recreation, and CCC in railroads and trucking fell 25%.

Hoarding of money

In a context of uncertainty in 2020, the liquidity of the companies studied reached record levels. According to The Hackett Group, as businesses sought to minimize risk and prepare for potential opportunities, the liquidity of the 1,000 largest U.S. companies reached $ 1.7 trillion in 2020, a whopping 40% increase from to 2019. Debt fueled much of the increase, as it grew 10% year over year. Only 9 of the 50 industries studied did not increase their debt levels in 2020. A reduction in capital investment also played a role.

Run annually for two decades, the CFO / The Hackett Group Working Capital Scorecard calculates the working capital performance of the largest US-based non-financial corporations. The Hackett Group extracts the data for these 1,000 companies from the latest publicly available annual financial statements.

For more on this year’s Working Capital Dashboard, see “Working Capital: Inventories, Receivables Need Special Attention”.

See How Working Capital Works for the Dashboard Approach for Calculation, CCC, DSO, DPO, and DIO.

Graphics: CFO / The Hackett Group 2021 US Working Capital Survey

Ramona Dzinkowski is a journalist and president of the RND Research Group.

cash conversion cycle, DIO, DPO, DSO, The Hackett Group, working capital, working capital dashboard

About Donnie R. Losey

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