Working Capital Performance Improves Marginally in 2013; Opportunity at Largest U.S. Companies is Over $1 Trillion
July 30 2014 - 9:30AM
Business Wire
In the Face of Slow Growth, Shrinking
Margins, and Low Interest Rates, Few Companies Focus on Optimizing
Collections, Payables, Inventory
U.S. 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 the
16th annual working capital survey from REL a division of The
Hackett Group, Inc. (NASDAQ:HCKT), and CFO Magazine. The amount
tied up in excess working capital at nearly 1000 of the largest
public companies in the U.S. is over a trillion dollars, according
to the REL/CFO research.
With the U.S. economy slow but stable, gross domestic product
increased by 3.2 percent in 2013. But at the same time, the REL/CFO
research found that gross margins decreased by 0.3 percent,
indicating that companies are spending more internally to generate
revenue.
The research also found that companies are continuing to borrow,
using low interest rates to improve their cash position, with cash
on hand increasing by 12 percent, or $110 billion. At the same time
companies continued to ramp up capital expenditures, which have
risen by 43 percent over the past three years.
The value of total net working capital rose by 3.2 percent in
2013, and days working capital improved by less than 1 percent.
While days sales outstanding and days payable outstanding improved
only slightly, Days inventory on hand showed no change at all.
Cash conversion efficiency, or the time companies take to
convert sales into cash, improved somewhat in 2013, after two years
of declines. In addition, free cash flow -- which is a key
indicator of the health of corporate cash flows and represents the
cash companies are able to generate after laying out money to
maintain or expand their asset base -- improved dramatically,
rising by 23 percent over the previous year, indicating an
improvement in cash flow management.
"The good news is that U.S. companies aren't getting any worse
at managing their working capital," said Analisa DeHaro, Associate
Principal for REL, a division of The Hackett Group. "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 optimize 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 REL/CFO research found that the largest U.S. public
companies still have over $1 trillion in excess working capital.
This amount, which represents the gap between top-quartile working
capital performers and typical companies, represents about a third
of the gross working capital held by these companies, and is equal
to nearly 6 percent of the U.S. gross domestic product. Excess
inventory represents the largest share of the working capital
management gap -- $423 billion.
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 percent of the 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 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 percent improvement, followed by road and rail companies
(12 percent improvement), auto components (11 percent improvement),
and food products (10 percent improvement).
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 997 of
the largest companies in the U.S. A similar annual study from REL
looks at performance of the largest public companies in Europe.
More details on the research findings are available in the public
excerpt of the survey results, available on a complimentary basis
with registration at this link:
http://www.relconsultancy.com/research/2014/pr/uswcsurvey/
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)
225-7300; by e-mail at info@relconsultancy.com; or on the Web at
www.relconsultancy.com.
RELGary Baker, 917-796-2391Global Communications
Directorgbaker@relconsultancy.com
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