HCKT Hackett Group Inc

By Tatyana Shumsky 

The Trump administration's tariff-heavy trade policy is putting a strain on working capital.

Some companies have run up inventories of raw materials or finished goods in a bid to front-run higher costs, analysts and executives say. Others have offered customers longer payment terms to help them adjust to the new policy landscape.

Those measures soak up cash -- an unintended impact of the tariffs that poses a threat to businesses' financial health. As more money is absorbed by product stockpiles or payments to suppliers, and less is received from customers, companies are left with less available capital or cash to cover their operations and any emergency expenses.

"There can be serious risks," said Craig Bailey, associate principal at consulting firm Hackett Group Inc., which estimates that about $3.4 trillion in working capital was locked up across U.S. companies at the end of 2018, up from $2.7 trillion five years ago.

That buffer may be unnecessarily large. U.S. companies could free up nearly 40% of that $3.4 trillion if they ran their businesses more efficiently, Mr. Bailey said. "As interest rates go up and as tariffs hit, they're going to find that they have too much cash tied up in inventories which they can't quickly realize and liquidate."

As companies face the possibility of further tariffs, those risks aren't going away. U.S. trade talks with China continue, and a new trade fight with Mexico was just narrowly averted. Any new tariffs are expected to bring new complexities to operations and prompt the need for more adjustments, raising the odds that working capital will soak up more cash.

Arrow Electronics Inc. knows this dilemma well. A few months ago, customers of the Centennial, Colo.-based electronics distributor were flummoxed by who was on the hook for newly assessed tariffs on Chinese-made goods, according to the company's chief financial officer, Chris Stansbury.

Some suppliers absorbed the costs. Others passed them along, charging extra for each part. Sometimes the charges were applied to each shipment. Others sent a month-end, lump-sum invoice for tariff charges.

"Tariffs caused a lot of confusion," Mr. Stansbury said.

And the confusion became an excuse for some customers to delay paying for their shipments, he said. "I was a little too patient and we got burned for that," Mr. Stansbury said.

The company's first quarter typically sees cash from operations turn negative as money gets tied up in IOU's from customers, inventory and bills paid to suppliers. But this year was an outlier: Arrow's operations absorbed $329 million in cash, compared with soaking up $75.1 million in the same quarter of 2018. Arrow worked closely with customers to make their accounts current and the situation has since improved, Mr. Stansbury said.

Threats of potential tariffs -- including on goods imported from Canada, Mexico, China, Japan and the European Union -- have caused some companies to take pre-emptive action.

Late last year, ahead of a potential increase in U.S. tariffs on Chinese goods, Costco Wholesale Corp. worked with suppliers to figure out how to divvy up tariff costs between the retailer, its suppliers and its customers, said finance chief Richard Galanti. Costco also estimated how the increases would affect customer demand and adjusted purchasing commitments.

"In some cases you brought in certain seasonal items that we'd typically get in January, February, to the extent you had availability of additional containers you brought in merchandise [early]," Mr. Galanti said.

Costco's precautions show how tariffs alter businesses' finances even before they take effect. In the end, the increase in tariffs from 10% to 25% on about $200 billion worth of Chinese goods didn't hit in January, as expected, and instead took effect in May.

Write to Tatyana Shumsky at tatyana.shumsky@wsj.com

(END) Dow Jones Newswires

June 10, 2019 11:01 ET (15:01 GMT)

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