What Have We Learned from the Great Recession?

By Susan Avery

June 25, 2015 at 12:34 PM

Derrick Steiner.jpgWhen it comes to cash management, have companies learned anything since the Great Recession? Are they prepared for an increase in interest rates?

Derrick Steiner, Management Consultant with REL, raises these questions as he walks My Purchasing Center through results of the new REL/CFO Working Capital Survey. REL is a division of The Hackett Group.

Steiner explains that this year the researchers updated their methodology to measure companies’ effectiveness at managing receivables, payables and inventory. Instead of using the measure Days Working Capital (DWC) as they had been, they now use the Cash Conversion Cycle (CCC), which REL considers a more accurate measure of the time each dollar is tied up in the buying, production and sales process before it is converted into cash through collection from customers. 

In addition to now using the CCC metric, he also points out that the researchers this time focused their analysis on the period since the start of the Great Recession rather than on year-over-year changes as they had in the past.  

Steiner tells My Purchasing Center that the researchers went into the study considering current thinking that companies are hoarding cash; now, they're debunking the myth.

“Since 2007, we’ve seen cash on hand increase 74%," he says. "So, while it may seem there’s an abundance of cash in the market, it's really not the case." He suggests instead using the metric cash on hand as a percentage of revenue. In 2007, this figure was 6%. In 2014, it was 8%. 

“When you normalize cash on hand for revenue, and revenue has risen 39% since 2007, you only get a 2% increase,” he says. “Has the market really gained any knowledge from the recession? Have we learned the importance of having cash reserves to weather turbulence in the market?”

He thinks not and describes a growing economy and businesses that are recovering. The source of companies' cash? Debt, which has increased 62% since 2007, he says. "When you couple that with companies’ ability to internally generate cash, that’s the CCC metric. It’s only improved a day, from 34 days in 2007 to 33 days in 2014.” 

Steiner uses the word “apathy” to describe the current situation. “Companies seem happy to take on increased debt and to invest,” he says. “Few are committed to cash management.” 

Cash Management Top Performers

In their analysis, the REL researchers studied the companies that have improved their CCC over the past year and past five and seven years. Of the 1,000 companies participating in the 17th annual working capital survey, 10% improved their CCC every year of the past three years, 2% improved in five years and 1% since 2007. 

“Only five companies have improved the CCC every year for the past seven years,” Steiner says. They are: AmerisourceBergen, Diebold, EQT, Goodyear and Masco.

The research shows that these companies have significantly better metrics. For instance, they’ve improved cash on hand by 293% since that time compared with 74% for the rest of the REL 1000. CCC has decreased 181%; for the rest, it’s 3%. Cash on hand as a percent of revenue increased 9% for the five companies; for the rest, it’s 2%.

Looking at companies that have reduced debt or increased it by 100% or more finds those that borrow more obviously have more cash on hand. However, their CCC has deteriorated 113% versus companies that reduced debt and are focusing on cash management, Steiner points out. They have improved their CCC by 31%.

“This confirms that debt is the source of increased investing,” Steiner tells My Purchasing Center. “The abundance of cash is a bit misleading and companies are not doing much to manage the CCC. We didn’t learn much from the Great Recession as it relates to cash management.” 

What does this mean for companies? “When interest rates rise, those that rely less on debt will be in a better position financially because they are more dependent on their own performance than the changing dymanics of the capital market,” he says. 

To get to that point, Steiner suggests companies first work to understand their current position, the key business metrics related to the CCC: DPO (Days Payables Outstanding), DIO (Days Inventory Outstanding) and DSO (Days Sales Outstanding). 

“Once you establish your own personal baseline, do comparisons within your industry to determine the opportunity and make the appropriate changes,” he says. “From there, establish whether it’s worth the time and effort. The last point is execution.

“There’s a lot of blocking and tackling to execute,” Steiner adds, suggesting companies look beyond the metrics to understand the key drivers in their businesses impacting their performance. “Metrics, root cause analysis and corrective action seem to be lacking.”  

Also see the My Purchasing Center article, Excess Cash? Consider Paying Suppliers Early 

 

 

 

 

 


Tags: purchasing Supply chain management Procurement sourcing
Category: Blog Post

Susan Avery

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Susan Avery is Editor-in-Chief at My Purchasing Center. She writes articles, blogs and white papers and manages and creates other content for the online procurement and supply management publication. She produces and moderates roundtable discussions, podcasts, webcasts and video interviews. Susan has 30 years experience covering procurement and supply management for Purchasing magazine and Purchasing.com. 


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