REL/CFO Magazine Survey Shows Working Capital Improvement Stalled for the First Time in a Decade, Driven by Slowing Sales Growth
June 26 2007 - 9:30AM
Business Wire
After nearly a decade of annual reductions in working capital,
overall the 1000 largest U.S. companies (excluding automakers and
financial institutions) showed no improvement in 2006 in large part
due to increased inventory as a result of both slowing sales growth
rate and increased use of overseas manufacturing facilities,
according to results of the Tenth Annual Working Capital Survey
conducted jointly by REL and CFO Magazine. REL, an Answerthink
company (NASDAQ:ANSR), is a world leading consulting firm dedicated
to delivering sustainable cash flow improvement across business
operations. The U.S. survey, which will be featured in the July
issue of CFO Magazine, found that the top 1000 largest
publicly-traded U.S. companies (by sales) are carrying as much as
$764 billion in excess working capital because of inefficiencies in
the way in they collect bills from customers, pay suppliers, and
manage inventory. Typical companies in the REL/CFO survey would
need to reduce their overall working capital by 48% to achieve the
levels seen by top performers. A parallel survey of total working
capital performance at Europe�s 1000 largest publicly-traded
companies (excluding automakers and financial institutions) found a
6.6% improvement over last year, liberating �46 billion ($62
billion USD). But overall total working capital performance by the
European companies was still 18% worse than that of their U.S.
peers. Typical companies in the REL/CFO survey saw Days Working
Capital (DWC) of 38.8 in 2006, with no change over 2005. There were
movements in each of the components of working capital, but overall
DWC stalled. This included: Days Sales Outstanding (DSO) of 39.5,
representing a 1.2% improvement over 2005; Days Payables
Outstanding (DPO) of 31.9, a .3% improvement over 2005; and Days
Inventory Outstanding (DIO) of 31.2, a 2.1% deterioration over
2005. All data presented here excludes automotive manufacturers,
which can sometimes skew results because of their large financing
arms. Financial institutions, including banks and insurance
companies, are also excluded from the survey due to their limited
working capital needs. The number of industries where companies
reduced their overall working capital in 2006 was down by nearly
50% compared to 2005. Industries where companies showed the
greatest DWC improvement included: Hotels; Restaurants &
Leisure; Independent Power Producers & Energy Traders;
Construction & Engineering; and Multiline Retail. Industries
where DWC performance degraded the most included: Gas Utilities;
Oil, Gas & Consumable Fuels; and Diversified Consumer Services.
�It�s difficult to understand why companies are not taking
advantage of the opportunity to drive improvements in working
capital, as this results in increased levels of cash flow which
should be of significant strategic importance. This is the cheapest
source of cash which can be used to enhance shareholder returns or
be dedicated to funding strategic initiatives such as paying down
debt, building new or additional capacity in low cost regions or
repurchasing shares,� said REL President Stephen Payne. According
to REL Senior Director Daniel Windaus, �We see two primary factors
in this year�s poor working capital performance by U.S. companies.
First, while sales continued to grow in 2006, the growth rate was
down by nearly 25% year over year. As a result, companies housed
more inventory due to the lag in supply matching the slow down in
demand. �Secondly, we believe this year�s poor U.S. performance is
tied to a hidden downside of offshore manufacturing,� said Mr.
Windaus. �As companies source materials or manufacture goods in low
cost countries the increase in lead times associated with shipping
parts of finished products to the U.S. contributes to rising
inventory levels. This also hinders the speed with which companies
can respond to demand changes, causing levels of obsolete inventory
to rise. To address this problem, companies will have to find the
right balance of taking advantage of cheaper product while creating
flexibility in their supply chains to respond better to demand
changes, both up and down.� �Working capital in 2006 was a �Tale of
Two Cities,�� said CFO Magazine Editor-in-Chief Julia Homer. �Those
leaders who drove improvements reduced working capital by�an
average of 11%. But the vast majority of�CFOs saw their company's
performance either stall or degrade.� Findings from the REL/CFO
survey will be featured in the July issue of CFO Magazine and the
July/August issue of CFO Europe. A more detailed REL analysis of
the findings is also available online at:
www.relconsultancy.com/twcUS. About REL REL is a world leading
consulting firm dedicated to delivering sustainable cash flow
improvement across business operations. REL�s tailored solutions
balance client trade-offs between working capital, operating costs
and service performance. REL�s expertise has helped clients free up
billions of dollars/euros/pounds in cash, creating the financial
freedom to fund acquisitions, pension liabilities, product
development, debt reduction and share buy-back programs. In-depth
process expertise, analytical rigor, and collaborative client
relationships enable REL to deliver an exceptional return on
investment in a short timeframe. REL has delivered work in over 60
countries for the Fortune 500. More information on�REL is
available: by phone at (770) 225-7300; by e-mail at
info@relconsultancy.com; or on the Web at www.relconsultancy.com.
About CFO Publishing CFO magazine and CFO.com are owned by CFO
Publishing, an Economist Group business. With a rate base of
450,000, CFO is the leading business publication for C-level and
senior financial executives. It reaches an international audience
of corporate leaders with its global group of magazines, including
CFO Europe, CFO Asia, and CFO China. For more information, visit
www.cfo.com.
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