Where Working Capital Is Working Best

Multinational companies’ cash conversion cycle continues to shrink, driven by improvements in days payables outstanding (DPO), according to this year’s “U.S. Working Capital Survey” by The Hackett Group. The study examined the 2017 annual reports from the 1,000 largest non-financial companies that have headquarters in the United States. The cash conversion cycle for these organizations is currently 33.8 days, a 4 percent improvement over 2016.

The largest companies have achieved even better results for working capital: Among the 20 biggest companies in the study by annual revenue, the median cash conversion cycle is just five days. (And because these companies have the largest portfolios of payables, inventory, and receivables, their outstanding working capital results skew the overall results; The Hackett Group’s calculation of the cash conversion cycle across all 1,000 companies is considerably tighter than the same statistic for the median company in the study.)

“If we remove the oil-and-gas sector, the cash conversion cycle has been shrinking, so improving, for six years now,” says Craig Bailey, associate principal at The Hackett Group.  “Organizations continue to extend the payment terms on their payables.” From 2016 to 2017, DPO lengthened from 53.5 days to 56.7 days.

Not surprisingly, the lengthening of payment terms has also impacted days sales outstanding (DSO), although to a smaller degree. For companies in the study, DSO deteriorated from 37.8 days to 39.5 days. “There are three likely reasons why DSO isn’t increasing at the same rate as DPO,” Bailey says. “It could be that the large organizations in our study are having success pushing out terms to smaller suppliers that aren’t represented in the data set. Organizations could be leveraging supply chain finance; we know that’s becoming a more popular option. And third, these organizations might be improving their collections processes. They’re no longer focused on challenging the payment terms extensions their buyers are requesting; instead, they’re focusing more on how to minimize the impact of the new terms and make sure payments are made on time.”

Days inventory on hand (DIO) stayed basically flat in 2017, increasing less than 1 percent from 50.7 days to 51 days. “We had a large increase in DIO a couple of years ago, driven by the shipping problems in 2014,” Bailey says. “Since then, we haven’t seen many organizations feeling the need to drive those buffers out of their supply chain. That’s not unexpected—DIO can often be the hardest metric to change because reducing inventories requires buy-in from competing internal stakeholders across your different functions.”

Moving forward, Bailey expects organizations that are doing well on DPO to turn their attention to reducing inventories, and for companies that haven’t optimized payments to focus on catching up in extending their DPO. “For a long time, in many sectors, working capital wasn’t a high priority because of low interest rates,” he says. “We are now seeing a clear trend toward organizations focusing on working capital. They’re going after DPO first. Then those organizations that have achieved world-class performance on the DPO are starting to move into DIO.

“What’s going to be very interesting,” Bailey adds, “is to see how things play out in 2018—so in our 2019 report. We are hearing from more and more organizations that are starting to feel the impacts of tariffs. Not only is inventory becoming more expensive for them, but some organizations have been strategically purchased in advance of tariffs coming in. We expect to see some inflated DIO in next year’s report, and to see organizations trying to offset that increase by playing with the working capital levers as they attempt to further improve DPO and DSO.”

There’s room for very significant improvement. In fact, The Hackett Group’s study found that the 1,000 organizations it evaluated had the opportunity to improve working capital by a total of $1.13 trillion. The report’s authors quantified this opportunity by dividing the companies into quartiles in terms of performance on each of the three core metrics: DPO, DSO, and DIO. Then, for every organization outside the top quartile, they calculated the amount of cash the organization would generate if its payables, receivables, or inventory improved to top-quartile performance. The study identified $443 billion in inventory opportunity, $334 billion receivables opportunity, and $358 billion payables opportunity. (See Figure 1, below.)

Shawn Townsend, director at The Hackett Group, says: “Working capital is really about process improvement, especially in the back-office functions that handle payables and receivables. We’re starting to see a lot of companies adopting robotic process automation, or RPA. Companies are looking at how they can optimize their working capital processes, and in some cases they’re even bringing outsourced processes back in-house with an RPA element that optimizes both their cost structure and their cash structure. We expect that trend to affect the cash conversion cycle in the future.”