Craig Bailey, Associate Director for Strategy and Business Transformation at The Hackett Group, Inc., details how the COVID-19 pandemic has affected working capital, inventory levels, corporate debt and payments to suppliers in 2020.
The pandemic has brought about “significant” changes in working capital performance in 2020, according to the Hackett Group survey of the 1,000 largest non-financial corporations. The underlying factors include declining revenues and cost of goods sold in many industries. At the same time, continuing a pre-pandemic trend, buyers have significantly slowed payments to suppliers. The cash conversion cycle deteriorated by 2%, driven by the increase in inventories and receivables. “Businesses were holding cash, borrowing at record levels, and debt and cash flow were up,” says Bailey.
Longer payment terms have compromised suppliers’ access to the capital necessary to maintain production. Before 2020, Bailey says, buyers may have requested extensions to structured payment terms. But with the advent of the pandemic, they simply withheld payments and unilaterally pushed extensions to vendors. (Some organizations have taken the opposite route, he notes, shortening the timelines to help suppliers during the crisis.)
The first half of 2021 saw no indication of a reversal of these trends. “It didn’t surprise us to hear so much uncertainty about when things will get back to normal and what future demand patterns and the supply landscape will look like,” Bailey said.
An increase in consumer demand in some industries, coupled with shortages of key materials, put unusual pressure on buyers to bring the product to market, and this dynamic served to shift the balance of power in favor of consumers. suppliers, at least temporarily. Meanwhile, corporate debt and available liquidity remain high as businesses prepare for an uncertain future and “difficult times ahead,” Bailey said.