CFOs Seek More Cash: 2022 Working Capital Dashboard

When the cost of debt and equity rises, savvy CFOs know they need to find capital elsewhere. So, they look for nooks and crannies where excess money can hide. This inevitably brings them to working capital – the funds regularly tied up in accounts receivable, accounts payable and inventory.

As benchmark interest rates rise in the United States, the release of liquidity from financial operations will become even more attractive. Given the economic climate, expect many businesses to tighten working capital this year, for example by shortening customer payment terms (where possible), putting more energy into collecting overdue accounts and avoiding overstock through better projections of customer demand.

After a disruptive pandemic, companies leapfrogged to increase working capital efficiency: the cash conversion cycle (CCC) of the top 1,000 publicly held non-financial U.S. companies fell to 34.2 days in fiscal 2021, up from 36.5 the previous year, according to this report. years CFO/Hackett Group Working Capital Dashboard.

The CCC metric expresses the time (in days) it takes a business to convert investments in inventory and other resources into cash flow from sales. The CCC equation is the number of days of sales past due plus the number of days of stock past due minus the number of days of payment past due (DSO + DIO – DPO).

A study of working capital performance conducted annually for two decades, The Hackett Group Working Capital Scorecard showed that CCC improved last year because days of outstanding sales (DSO) fell by 1.1 days and days-in-process (DIO) fell by one day, reversing increases in 2020. A slight increase in DPO last year also helped. (See chart, All Metrics Trend Positively.)

“It was a very unique year, what we call a triple crown event,” said Hackett Group Director Shawn Townsend. “All three measures of working capital are trending positive for the first year since 2010.”

The question now is how much better can companies do in 2022, especially in a highly inflationary economic climate that still suffers from supply chain disruptions?

DPD: harder from here

Unpaid days owing, the time it takes for businesses to pay bills from trade creditors, hit an all-time high in 2021. The metric has grown steadily over the past decade as customers have been sitting on bills and bills for longer periods. Companies paid their suppliers in about 48 days in 2009; in 2017, the DPO was up to 56 days. Last year, DPO hit an all-time high – 62.2 days, more than two full months. (See table, Extend Payments.)

“The DPO has always been the shining star of all three components of working capital because it’s arguably easier to influence,” Townsend said. This is especially true if a company has a lot of influence over its suppliers.

The improvement in DPO 2021, however, was only small. Outside of the DPO which jumped 4.7 days in 2020 as cash-strapped companies tried to maximize liquidity, the improvement in the DPO has slowed.

For one thing, supply chain bottlenecks have forced buyers to requisition goods on terms more favorable to sellers, according to the Hackett Group Scorecard report. Second, companies in certain sectors may reach the upper limit of extending payment terms.

With companies diversifying their suppliers and, in some cases, still competing for rare parts (eg, semiconductors), buyers have lost some of their grip on payment terms, Townsend said.

GRD: Economic Aid

The biggest opportunities to free up cash from working capital and accelerate cash conversion are in receivables and inventory.

DSO, the time to collect a sale, fell by 1.1 last year to 40.6 days. The DSO hasn’t been consistently below 40 days since 2014-2016 and has hovered in a narrow range since 2016. The trend is not surprising given the strenuous efforts of buyers to extend payment terms.

Of the 50 industries analyzed by Hackett for 2021, 31 improved DSO. Some of DIO’s biggest improvements came from airlines (19%), machinery (19%) and recreational products (17%) – “all industries with a strong business-to-consumer component that are doing well with a rebound economic,” Hackett analysts said.

General Electric, though heavily business-to-business, cut its DSO to 101 days from 156 in 2021. The industrial giant scrapped most of its factoring programs in April 2021 in favor of building its internal billing and collection capabilities.

The development of e-commerce channels and capabilities across a wider range of industries is also having a positive impact on working capital, said Shawn Townsend of The Hackett Group.

Among automakers, which on average reduced DSO by 11% last year, Tesla had the best results, reducing DSO from 22 days to 13 days. Tesla’s net working capital (current assets minus current liabilities) has been negative by several billion dollars for the past few years, so the company has been working on “strengthening core operations” to improve cash flow timing. cash.

Clearly, the DSO performance of the 1,000 companies benefited from the rapid economic recovery. Some companies that temporarily extended payments to increase liquidity during the pandemic have been forced by providers to return to more standard terms in 2021, Townsend said. The development of e-commerce channels and capabilities across a wider range of industries is also having a positive impact on working capital, he said.

But due to economic uncertainty on multiple fronts, this year CFOs need to review credit risk management policies and traditional credit and collections management processes, “to ensure agility in capturing changing payment behaviors, minimizing exposure to bad debt,” Hackett analysts said.

DIO: persistent supply problems

Inventory levels for the 1,000 companies surveyed rose 17% in 2021 as “companies ramped up production and advanced orders in 2021,” according to the Hackett Group report. But soaring consumer demand after pandemic peaks helped cut DIO by a day, to 55.7. This reversed the trend evident in 2019 and 2020, when DIO increased by 1.4 days and 3.3 days, respectively.

There is no doubt that companies want to reduce DIO again this year and better manage the amount of inventory they need in this economy. As CFO wrote a year ago, “Inflation expectations [and] of rising interest rates…should put more emphasis on stocks, because that’s where a lot of the money is stuck.

However, many supply chains still have bottlenecks, which will complicate the efforts of CFOs.

Appliance company Carrier Global kept its DIO flat in 2021, a notable feat as it faced higher material costs; the need to build up safety stock and, said CFO Patrick Goris in December 2021, the inability to ship product due to parts shortages.

“We can have 99% of the components to ship something. We are waiting for that 1% to arrive. And so that impacts our working capital,” Goris told a Credit Suisse investment conference, according to S&P Capital IQ.

At the time, Carrier expected lower inventory requirements in 2022 to be a tailwind for working capital management. But at the time of the company’s April first-quarter earnings call, Carrier was still waiting for the expected boost. Higher quantities of safety stock were always the norm, and missing components always delayed shipments, Goris said.

In Food and Staples, average DIO rose three days, driven by 14% higher inventory levels. The situation may not improve this year, according to Hackett Group analysts. (See chart, The Best of Mobile Inventory.)

“Inventory levels in the industry have increased due to strong consumer demand and large inventories by retailers to reduce costs and protect margins in anticipation of historic increases in food prices,” according to the Hackett report. “While food prices are expected to rise further due to inflation, inventory levels will most likely maintain an upward trend.”

End-to-end reviews of supply chains, already underway in many organizations, are essential for 2022. In particular, CFOs must ensure that any changes in customer demand signals are quickly recognized and captured. , then communicated to the entire company, Townsend said. Risk assessments conducted on cash, cost and service implications should accompany these reviews.

While companies can take advantage of levers such as finding new sources of supply closer to the customer to reduce inventory balances, most currently only manage supply chains in the short term.

The prevalence of economic and geopolitical uncertainties makes it difficult (and perhaps unwise) “to really plan for the long term,” Townsend said.

The Hackett Group Working Capital Survey and Scorecard calculates working capital performance based on the latest publicly available annual financial statements of the 1,000 largest non-financial corporations headquartered in the United States, sourced from FactSet/FactSet Fundamentals.

About Donnie R. Losey

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