A recently conducted survey by of REL suggests that businesses are ignoring large opportunities for optimizing capital, particularly in relation to payables, collections and inventory management.
Evaluating the overall performance of thousands of the largest U.S. public companies, the figures are not encouraging. Hackett found that corporate debt was up 9.3% to $413bn in 2015. It was the 7th straight year of rising debt tiers, growing businesses’ overall debt site by greater than 58% since 2009.
The noticeable driving force behind the trend is obstinately low interest rates that function as a discouragement for any real attempt to optimize working capital. As an alternative, businesses prefer to borrow while it is still inexpensive to accomplish that. Some of the cash has been used for share repurchase, corporate acquisitions and dividend payments. And some of the cash is just to save in the bank.
The director of The Hackett Group, Inc., Derrick Steiner says, “with the slow to increase Federal Reserve interest, businesses get access to an easy source of cash generation that calls for minimum effort in making your business improved and better.” In his point of view, it really is a thoughtless approach.
The problem is only one indication of a larger condition, whereby businesses have been sitting on cash pile since the Great Recession. It is as if they are suffering the distress of the financial slump, and are frightened of being stuck without adequate funding.
But full coffer don’t necessarily indicate strapping financial overall performance. Steiner notes that the cash conversion cycle, calculating businesses’ ability to turn spending on overhead, inventory and labor into cash has declined by 7%, or 2.4 days. It is presently at 35.6 days, the worst since 2008 economic disaster.
Steiner notes that, a major contributing factor to that depressing picture is the low oil prices. An excess of supply has resulted in a quick increase in oil and gas, function as a drag on the balance sheets.
In all surveyed industries, declining performance was marked across the board. Inventory performance was the largest factor in the deterioration of working capital, days with inventory outstanding rising in excess of 10% to over 49 days. Days sales outstanding (collections), in the meantime, deteriorated by 1.1%, while days payable outstanding (payables) improved by over 5%.
Economical as cash is at present, there is an even better source of liquidity available to companies: the optimization of internal procedures. As said by Hackett, businesses in the survey have the chance to improve working capital by more than $1tr, or 6% of the United States Gross Domestic Product, based on the overall performance of the top performers in each industry. The number breaks out into $421bn in inventory, $334bn in payables and $316bn in receivables.
Hackett notes, that top performers convert working capital into cash quicker than straggler. They collect from customers quickly and pay suppliers more than two weeks slower, and hold below half of the amount of inventory. However in survey, only 200 businesses achieved that performance level.