Many largest companies in the US decided to go even more into debt last year instead of picking out cash from their businesses by way of improving how they collect from their customers, manage inventory and pay suppliers, in keeping with the new annual working capital survey from REL. The general performance of working capital continued to mortify, reaching the overall bad performance levels since the 2008 financial disaster. A major issue on this year’s overall results was low oil prices, which caused the owners of oil and gas companies to increase reserves, considerably declining both their inventory and working capital performance, and devaluating the performance of the whole survey group.
The survey is based on the 1,000 of the large companies in the US throughout 2015. As a result of low interest rate, it noticed that the corporate debt growing significantly for the seventh consecutive year. The debt was up 9.3% to $413 billion this year. The total debt position of the businesses in the survey was increased by over 58%.
The overall working capital performance that includes inventory, payables and collections—deteriorated to some extent, with a decline of 2.4 days or 7% in cash conversion cycle, or the ability of businesses to turn spending on overhead, unprocessed material and workforce into cash. It is currently at 35.6 days, the unfavorable before the 2008 financial disaster. Cash conversion cycle is a basic measure of working capital performance, which factors in how good businesses are at inventory, payables and receivables.
The chance of working capital improvement for businesses according to the survey is now over $1 trillion or 6% of the U.S. GDP. By component, the improvement opportunity in inventory is $421 billion, $334 billion in payables and $316 billion in receivables. This chance represents the amount of working capital improvement that could be accomplished if all businesses reached the working capital overall performance of top quartile performers in their individual industry. Top performers in the REL 1000 are actually seven times quicker at converting working capital into cash than the usual businesses. These companies collect from their clients more than two weeks quicker, pay the suppliers more than two weeks slower and keep less than half of the inventory.
Craig Bailey, Senior Director of Hackett Group said that “again, the low interest rates gave corporations a great excuse to disregard the hard work of optimizing receivables, inventory, and payables, leaving over $1 trillion pointlessly tied up in operations. As opposed to doing the hard work of transformation, most simply leveraged their future with more funding.”
Bailey also added that “simultaneously, weak oil costs impacted inventory performance at oil and gas companies. The West Coast port strike, which ended in the start of 2015, was most likely also a causative aspect to this year’s outcomes, as it caused supplies to collect in stockroom. Businesses took much of last year burning off those inventories”.
Ben Michael, Director of Hackett Group said that, “in the end the rates of interest will rise again and there are some indications that this may take place soon. Then many businesses can find themselves in an extreme stress after worsening working capital performance and growing debt after seven years. Small businesses are getting out of the curve and start making the necessary changes they need to get unnecessary amount of cash out of the key areas”.