Top U.S. Companies Now Collect From Customers Two Weeks Faster, Pay Suppliers Nearly Three Weeks Slower And Maintain Less Tha...
September 14 2017 - 09:30AM
Business Wire
The Hackett Group’s Research, also Shows
Direct Link Between Working Capital Improvement and
Profitability
Top performers in working capital now collect from customers
over two weeks faster, pay suppliers nearly three weeks slower, and
maintain less than half the inventory of typical companies in their
industry, according to new working capital research from The
Hackett Group, Inc. (NASDAQ: HCKT). Overall, top performers are
nearly 3x faster at converting working capital into cash, with a
cash conversion cycle (CCC) of only 17 days, nearly 30 days faster
than typical companies.
The 2017 U.S. Working Capital Survey, which examined the
performance of 1,000 of the largest public companies in the US in
2016, found that typical companies now have more than $1 trillion
unnecessarily tied up in working capital. CCC improved by 4 percent
in 2016, largely because companies paid suppliers nearly four days
(7.6 percent) slower. At the same time, debt increased by nearly
$350 billion (7.3 percent). CCC is a standard metric used to
quantify the ability of companies to convert invested resources
into cash, and incorporates payables, receivables, and
inventory.
In a separate research piece, The Hackett Group found a direct
relationship between sustained working capital optimization and
improved earnings and profitability. By reducing the key working
capital metric of cash conversion cycle (CCC) by 7 days, companies
can add 1 percent to earnings before interest, tax, depreciation
and amortization (EBITDA) margin, increasing profitability by about
20 percent (for a company with an EBITDA margin of 5 percent), the
research found.
The annual working capital survey was featured recently in CFO
Magazine. A complimentary analysis of the survey results is
available, with registration, at this link: https://goo.gl/xSPDvq.
The companion research on working capital and profitability is also
available free, with registration, at this link:
https://goo.gl/lCc0AC.
The working capital profitability research used advanced
regression analysis to establish the strength of the relationship
between working capital performance and improved profitability, and
to demonstrate that working capital performance was causing the
profitability improvement, and not vice versa. The research
examined working capital performance over a 10-year period.
A seven-day reduction in CCC can add an additional 1 percent to
EBITDA margin in the top 20 industries, the research found – a
striking number given that EBITDA margins in many industries today
are in the single digits. In the top 10 industries, the potential
impact was even greater, totaling over 2 percent EBITDA margin
improvement. Assuming an initial EBITDA of 5 percent, this can
represent a 20-40 percent improvement, generating significant cash
and improving profitability.
“Overall, it’s clear that most companies still don’t see a
pressing need to focus on working capital improvement,” said
Veronica Wills, associate principal, North America working capital
practice lead, The Hackett Group. “Companies came out of the
recession knowing they need cash to survive. But they continue to
rely on financial instruments like cheap debt and supply chain
financing rather than do the fairly straightforward tactical work
of optimizing payables, receivables, and inventory.”
“This research provides finance leaders with the ammunition they
need to make a business case for working capital improvement,” said
Wills. “It tells business leaders precisely how much working
capital improvement can be worth on their balance sheet. By making
sustainable changes companies can generate real cash that can be
used to bolster the bottom line, fund new initiatives and
acquisitions, or reduce the need for outside investment.”
“It truly takes a village to drive working capital improvement,
because sales, procurement, supply chain, and others need to be on
board, as they own key parts of the underlying processes,” said
Wills. “Cross-functional transformation can be challenging, and the
support of corporate leadership is key. We hope finance leaders
take this research to their CEOs and COOs, and use it to make the
case for change.”
About The Hackett Group
The Hackett Group (NASDAQ: HCKT) is an intellectual
property-based strategic consultancy and leading enterprise
benchmarking and best practices implementation firm to global
companies, offering digital transformation and enterprise
application approaches including robotic process automation and
cloud computing. Services include business transformation,
enterprise performance management, working capital management
and global business services. The Hackett Group also provides
dedicated expertise in business strategy, operations, finance,
human capital management, strategic sourcing, procurement and
information technology, including its award-winning Oracle EPM and
SAP practices.
The Hackett Group has completed more than 13,000 benchmarking
studies with major corporations and government agencies, including
93% of the Dow Jones Industrials, 87% of the Fortune 100, 87% of
the DAX 30 and 58% of the FTSE 100. These studies drive its Best
Practice Intelligence Center™ which includes the firm’s
benchmarking metrics, best practices repository and best practice
configuration guides and process flows, which enable The Hackett
Group’s clients and partners to achieve world-class
performance.
More information on The Hackett Group is available at:
www.thehackettgroup.com, info@thehackettgroup.com, or by calling
(770) 225-3600.
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version on businesswire.com: http://www.businesswire.com/news/home/20170914005163/en/
The Hackett Group, Inc.Gary Baker, 917-796-2391Global
Communications Directorgbaker@thehackettgroup.com
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