Inventory management issues impact working capital

leestat AdobeStock_503946321

The 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 navigated inventory management in the face of high levels of uncertainty, according to the second quarter 2022 update of the Working Capital Survey conducted by The Hackett Group, Inc.

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 indicates a shift in the leverage to sellers, driven by supply chain bottlenecks, inflationary pressures and geopolitical risks, among other issues.

“This is the true definition of an inflection point and a trend that is set to continue,” says 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.

From BusinessWire:

  • Days In Stock (DIO) remained virtually flat over the period, rising only 0.1% (staying at 46.5 days).
  • The number of days outstanding for 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 result in a 2% increase in the cash conversion cycle (CCC).
  • Operationally, revenue continued its meteoric rise in the second quarter, growing nearly 20% (4-5 times what was seen before the pandemic). Free cash as a percentage of revenue is down nearly 30% and back to pre-pandemic levels, signaling companies are using cash hoarded during the pandemic to pay down debt in anticipation of further interest rate hikes .

“We had seen an atypical improvement in DIO over the past year, which seemed to indicate that businesses had learned lessons from the pandemic. But businesses are still grappling with huge uncertainty and maintaining the inventory line in this environment is actually a big win,” says Hackett Group Director Istvan Bodo.

“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,” says Townsend. “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.

“Now is not the time for companies to slow down 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,” adds Townsend.

About Donnie R. Losey

Check Also

Hackett Group’s Second Quarter Working Capital Survey Update Reveals Companies Hit Payment Term Extension Limits as They Manage to Address Inventory Issues

MIAMI & LONDON–(BUSINESS WIRE)–The largest public companies in the United States may have reached the …