Hackett Group survey finds that the top 1,000 US companies are leaving more than US$1trn in working capital on the table.
The top 1,000 US companies have the chance to increase their profits by as much as 20%. Yet, very few are taking steps to do so. This was the key finding of the latest US Working Capital Survey by the Hackett Group.
This was despite the fact that the survey, compiled using publicly available data on the 1,000 largest non-financial US corporates, found that there was a slight improvement in the average cash conversion cycle (CCC), which fell from 37.1 days in 2015 to 35.7 days in 2016.
In focus: the cash conversion cycle
Diving deeper into the data, the survey found that much of the improvement came from corporates’ work on the day’s payables outstanding (DPO) side of the working capital equation. This has seen average DPOs pushed out from 49.5 days in 2015 to 53.2 days in 2016.
This improvement is largely down to corporates pushing out payment terms to their suppliers and an increase in the usage of supply chain finance (SCF) solutions, according to the survey.
Anecdotally, Treasury Today is also seeing an increasing number of corporates interested in using SCF. Much of this demand is coming about as the technology that underpins these programmes develops, enabling them to provide greater benefits to suppliers and buyers. And with more fintech firms entering this space we expect to see further developments here over the coming years.
Moving the needle
Despite the improvements in DPO, corporate days inventory outstanding (DIO) and days sales outstanding (DSO) performance deteriorated in 2016. Hackett notes that this is because driving improvement in these areas is hard. This is because they require significant internal and external process changes and senior management buy-in.
The good news is that the Hackett Group sees that corporates are recognising that they need to improve in these areas and are beginning to look more closely at DIO and DPO. This is being driven, in part at least, by emerging technology that is aiding corporates looking to improve their processes.
To provide an example of this on the DPO side, Treasury Today recently reported on a new solution from Bank of America Merrill Lynch that is helping corporates drive efficiency in their accounts receivables process. Elsewhere, in the realm of DIO, the internet of things (IoT) and blockchain technology are opening up opportunities to more dynamically manage inventory.
Be the best
The low rate environment in the US has enabled corporates to place less focus on working capital in recent years. However, with rates rising in the US, now might be the time for corporates to begin seriously focusing on driving improvements in their CCC.
The results of the top performers speak volumes on the reasons. According to the Hackett Group’s data, those companies within the top quartile for working capital performance converted their cash nearly three times faster than the median performers. Doing so allowed them to return 63% more than the median or in dollar terms, savings of US$186.7m of cash flow per US$1bn of sales.
This can have a sizeable impact on profits. The Hackett Group explains that “every seven-day reduction in cash conversion yields a 1.2% improvement in gross margin, 1.1% in EBITDA margin and 0.8% return on capital employed”. For a company with a 5% EBITDA margin, this translates roughly to a 20% increase in profit.
Want to know how to improve your working capital metrics?
Treasury Today and Treasury Today Asia will be talking to some of the world’s leading banks and corporates about the latest innovations in working capital management in the November/December edition of the magazine.
In the meantime, read how Pfizer won an Adam Smith Award for its work improving its CCC.