Industries That Got Paid Faster: Working Capital Dashboard

Most CFOs would say it’s important to build cash on the balance sheet. But one way to do it – convert sales into cash faster – is sometimes overlooked. One reason: In recent years, low interest rates have made it less expensive to use debt to increase liquidity. This has resulted in less emphasis on working capital management; in particular, the effective management of accounts receivable (AR).

Now that the Federal Reserve is raising the federal funds rate and interest rates are heading north, some finance departments will focus on the timing of cash flows. In the AR function, this means keeping tight control over customers to get them to make payments on time, as well as tracking down and collecting overdue payments.

Metric finance managers will try to reduce the number of days outstanding in sales (DSO) – the time it takes to collect payment for a sale. It’s much easier said than done. DSO worsened (or increased) in 2019 and 2020, according to the report CFO/The Hackett Group Working Capital Scorecard as customers delayed payments to bolster their own cash cushions.

But in 2021, according to the Hackett Group dashboard, the trend has reversed for more than half of America’s 1,000 largest companies. (See CFOs Hunt for More Cash: 2022 Working Capital Scorecard for full results released last week.) Overall, DSO fell from 1.1 last year to 40.6 days. (The equation to calculate DSO is year-end trade receivables net of allowance for bad debts, divided by one day of sales.)

Many factors contributed to faster payouts. A 22% gain in revenue among the 1,000 companies helped, as did the increase in DSO in 2020. During the 2020 pandemic, some suppliers were persuaded to temporarily extend credit terms for buyers, s they could handle the slower entries themselves. In 2021, however, vendors have sought to return to selling on more standard payment terms, said Hackett Group director Shawn Townsend.

From an industry perspective, improvements to the DSO were widespread but not uniform. The rapid economic rebound in the United States, which fueled strong consumer demand, helped sectors like airlines, leisure products, hotels and restaurants produce healthy reductions in DSO. (See chart “A Better Job of Managing Accounts Receivable.”) But some industries, such as Semiconductors and Equipment and Containers and Packaging, have had to wait a little longer for buyers to pay their bills. .

Of the 49 industries listed in the chart Hackett analyzed for 2021, 32 saw DSO improvement and 17 saw DSO deterioration (even slight). Traditional payment terms varied by industry, of course. As the graph shows, normal terms in aerospace and defense (more than two months), for example, would not fly in the food industry (less than 30 days). In fact, only 20 industries had a DSO below the overall measure of 40.6 days. The median DSO for the 1,000 companies was higher – 48.7 days.

For benchmarking purposes, it can be useful to know how your company’s sector is performing, but be aware that there are also wide variations within sectors. In the beverage industry, for example, Boston Beer lowered the DSO from 16 to 10 days, while Monster Beverage’s DSO went from 53 to 59 days.

It should also be noted that most of the industries that collected invoices faster did not pass on their good fortune to their suppliers. Of the top 10 sectors that improved DSO the most (the top 10 sectors listed on the chart), only three paid their trade creditors faster: Recreational Products, General and Specialty Retail, Auto Parts and Aftermarket.

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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