By Dennis Bouley
Despite the fact that many companies are generating more cash than in the recent past and are producing their highest working capital performance since 2008, the rate at which they are paying their suppliers is deteriorating, according to a recent Hackett Group research study.
The Hackett Group’s 2018 US Working Capital Survey and scorecard calculates working capital performance based on the latest publicly available annual financial statements of the 1000 largest non-financial companies in the United States. The survey found the companies had a Cash Conversion Cycle (CCC) of 33.8 days in 2017, an improvement of 1.5 days (4 percent) over 2016. CCC is a standard metric used to quantify the ability of companies to convert invested resources into cash, and incorporates payables, receivables and inventory. The 2017 improvement is in contrast to a high CCC of 37.3 days seen in 2015, and nearly matches the lowest recent CCC of 33.4 days seen in 2008, which was driven largely in changes made in response to the recession.
“For the first time in years we’re finally seeing rising interest rates, and that is driving more companies to look at improvements to working capital,” said The Hackett Group Associate Principal Craig Bailey. “The record level of M&A is also starting to increase the focus on both cost and cash. So, we’re seeing a significant improvement in working capital performance. But debt is also reaching record levels, and despite the improvements, it appears clear that most companies are still looking for quick fixes and avoiding doing the process improvement and other hard work required to truly improve working capital.”
How suppliers are being impacted
According to Bailey, a primary strategy for improving working capital performance is to hold back payments to suppliers, in some cases extending payment terms up to 120 days. “Payables are often the easiest starting point for working capital improvement, as the processes are largely in finance’s area of control, and it has less risk of impacting on customers. Unfortunately, when companies extend payment terms it has significant impact on the Days Sales Outstanding (DSO) performance of their suppliers. This year it is driving DSO to a 10-year high. It can even destabilize a supply base, if companies are not careful,” he said.
The downside of a working capital improvement strategy that delays supplier payments is that it masks process issues that will continue to persist. In addition, the burden of working capital performance is transferred onto smaller companies that cannot improve their payables performance, as easily as those with consolidated supply bases.
Rather than delaying payments to suppliers and avoiding dealing with underlying issues, Hackett Group Director Shawn Townsend recommends a longer-term payables optimization approach through modernization and process improvement. “There are simply much better options available. For example, companies can focus on differentiating critical from non-critical suppliers. They can strive to improve the procure-to-pay cycle without impacting supply base, through process improvement, digitization, robotic process automation, blockchain, and other digital transformation approaches,” he said.
For more information on the Hackett Group’s research study, register for their complete research report at http://go.poweredbyhackett.com/qphs.
The Hackett Group (NASDAQ: HCKT) is an intellectual property-based strategic consultancy and enterprise benchmarking and best practices digital transformation firm supporting global companies, and offering digital transformation including robotic process automation and enterprise cloud application implementation. Services include business transformation, enterprise analytics, working capital management and global business services. The Hackett Group also provides expertise in business strategy, operations, finance, human capital management, strategic sourcing, procurement and information technology.
Dennis Bouley is Editorial Director of MyPurchasingCenter.com and special advisor to MediaSolve Group, a strategic B2B marketing services firm focused on helping companies and institutions leverage the web and social media to achieve business goals. He spent 18 years at Schneider Electric as Managing Editor of Global Publications, and was responsible for cross-division management of the corporation’s white paper and customer success story processes. Prior to that, he spent 10 years working for IBM managing both small and large accounts. He holds a Bachelor of Arts in Journalism from the University of Rhode Island and holds a Certificat Annuel from the Sorbonne in Paris, France.
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