MIAMI & LONDON–(BUSINESS WIRE)–The largest public companies in the United States may have reached the limits of their ability to stretch payment terms with suppliers in mid-2022, as they managed inventory management quite well in the face of high levels of global uncertainty, according to the Q2 2022 Working Capital Survey Update by The Hackett Group, Inc. (NASDAQ: HCKT).
2021 was a year like no other in recent memory, with improvements in all three main components of working capital – businesses managed inventory more efficiently, collected customers faster and took longer to pay suppliers. But the first half of 2022 saw several new developments. As a follow-up, The Hackett Group® recently completed an analysis of working capital performance through the end of the second quarter of 2022, examining the 1,000 largest non-financial public companies in the United States and comparing their performance with the second quarter of 2021, in order to reduce the cyclical and seasonal impact on the data.
The updated survey is available for download, with registration at this link, and is also covered in this recent episode of The Hackett Group’s “Business Excelleration Podcast”. Here is a summary of the main findings:
Businesses may have reached the upper limits of payment term extensions. After a slowdown in the growth of days unpaid (DPO) over the last two quarters, the DPO decreased by 1.1% (from 56.5 to 55.9 days) in the second quarter of 2022. This seems to indicate a shift from leverage to sellers, due to supply chain bottlenecks, inflationary pressures, and geopolitical risks, among others. “This is the true definition of an inflection point and a trend that is set to continue,” said Shawn Townsend, Principal of The Hackett Group. “Buyers have become more concerned with assurance of supply and have had to become less prescriptive about how they receive goods and services. Additionally, while supply chain finance remains popular, buyers are more focused on using it to stabilize and strengthen the supply base than to extend payment terms.
Despite the difficulties, companies have maintained the performance of their inventories. Days In Stock (DIO) remained virtually flat over the period, rising only 0.1% (staying at 46.5 days). According to Hackett Group Director István Bodó, “We have seen an atypical improvement in DIO over the past year, which seems to indicate that companies have learned lessons from the pandemic. But businesses are still grappling with a tremendous amount of uncertainty, and maintaining the inventory line in this environment is actually a big win.
The number of days outstanding in sales – the third major component of working capital performance – also remained broadly stable during the period, decreasing by 0.1% (to remain at 40.1 days). These three elements of working capital combined to generate a 2.0% increase in the cash conversion cycle.
On the operational front, which often drives working capital performance, revenue continued its meteoric rise in the second quarter, growing nearly 20% (4X-5X what was seen before the pandemic). Earnings before interest, taxes, depreciation and amortization decreased slightly and net profit margin decreased by 4.6% compared to the same period in 2021, due to the increase in the cost of materials and high inflation since decades. Cash as a percentage of revenue fell nearly 30% and returned to pre-pandemic levels, signaling companies are using cash hoarded during the pandemic to pay down debt in anticipation of further interest rate hikes .
“The headwinds will clearly continue to persist for the foreseeable future, and working capital management discipline, planning and foresight can play a key role in helping businesses succeed,” Townsend said. “Inventory management presents one of the biggest conundrums for businesses today. It is critical for businesses to ensure they can quickly recognize and respond to changing demand signals. Regarding receivables, companies should continue to review the credit and collection management process, as well as payment terms and contractual milestones.With suppliers, improving supplier management is essential.The criticality of suppliers, competition for resources and availability of supply may warrant revisiting sourcing, location and working capital strategies.Contingency planning is also becoming increasingly important, including the integration risk in the cash/cost/service equation.
Bodó added: “Now is not the time for companies to ease their foot when it comes to working capital and cash flow management. Smart business leaders will double down on their working capital health management capabilities – increasing their visibility into key metrics, better sharing information across functions and automating processes – to enable agility in a context of continuous change.
About Hackett Group
The Hackett Group, Inc. (NASDAQ:HCKT) is an intellectual property-based strategic consultancy and leading enterprise benchmarking firm for global enterprises, delivering digital transformation, including leading enterprise cloud applications, workflow automation and analytics that enable Digital World Class™ performance.
Backed by our unrivaled intellectual property from nearly 20,000 benchmark studies of the world’s largest companies – including 97% of the Dow Jones Industrials, 94% of the Fortune 100, 70% of the DAX 30 and 51% of the FTSE 100 – captured through our leading benchmarking platform Quantum Leap® and our Digital Transformation Platform (DTP), we are accelerating the implementation of best practices.
More information about The Hackett Group is available at www.thehackettgroup.com, by emailing [email protected] or by calling (770) 225-3600.
The Hackett Group, the quadrant logo, World Class Defined and Enabled, Quantum Leap, Digital World Class and Hackett Excelleration Matrix are registered trademarks of The Hackett Group.
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