Corporate Debt Continues to Skyrocket As Companies do Little to Generate Cash By Optimizing Collections, Payables, and Invent...
June 16 2015 - 9:30AM
Business Wire
REL’s 2015 Working Capital Survey Finds Cash
Flow Improvement Opportunity of More Than $1 Trillion;Top
Performers Hold Half the Inventory, Collect from Customers Two
Weeks Faster, and Pay Suppliers More Than Two Weeks Slower
In today’s business world, the old adage “Cash is King” is being
replaced by “Debt is King,” according to the results of the 17th
annual working capital survey from REL a division of The Hackett
Group, Inc. (NASDAQ:HCKT), and CFO Magazine.
The study, which examines the working capital performance of
nearly 1000 of the largest public companies in the U.S., found that
companies continue to take on alarming amounts of debt. Debt rose
by over 9 percent in 2014 to nearly $4.6 trillion, with companies
leveraging low interest rates to fund increased investment
activities. At the same time, companies once again made almost no
improvement in working capital management, doing little to generate
cash internally by optimizing how they collect from customers, pay
suppliers, and manage inventory. A public excerpt of the survey
results is available on a complimentary basis with registration at
this link:
http://www.thehackettgroup.com/solutions/working-capital-management/.
Companies that doubled their debt or more since 2007 saw their
working capital performance worsen dramatically, REL’s research
found, while companies that decreased their debt over the same
period saw a significant improvement.
Cash on hand decreased for the first time in a decade in 2014,
largely due to expenditures on acquisitions, according to REL’s
research. But it has risen by 74 percent since 2007, and at $932
billion remains near its all-time high. Capex spending also
continued its comeback, rising by 11 percent in one year.
For 2014, REL found that companies in the study could improve
their cash flow by over $1 trillion, or 6 percent of the U.S. gross
domestic product, by matching the performance of top companies in
their industry. Inventory optimization represents the largest share
of this opportunity. Top performers, who are seven times faster at
converting cash into cash than typical companies, now hold less
than half the inventory (22.2 days vs 50.7 days), while collecting
from customers over two weeks faster (24.8 days vs 42.6 days) and
paying suppliers 40 percent slower (55.4 days vs 39.5 days). CCC
improved only marginally in 2014, shrinking by .7 days or 2
percent.
“U.S. companies are clearly enjoying all the benefits of the
recent economic acceleration. However, their addiction to debt, and
their apathy toward true cash flow management, is very
disconcerting. Today, money is cheap. But there’s no question that
interest rates will rise, possibly sooner rather than later. And
when that happens, companies focused on optimizing their CCC will
be best positioned to mitigate their risk, continue to fund
investment, and outperform their peers,” said REL Associate
Principal Analisa DeHaro.
For the first time this year, REL shifted from its historic
calculation of Days Working Capital (DWC) to measure how effective
companies are at receivables, payables, and inventory, to using
Cash Conversion Cycle (CCC) as its preferred metric. CCC more
accurately quantifies the time each dollar is tied up in the
buying, production, and sales process before it is converted to
cash through collection from customers. CCC has improved by only
3.9 percent (1 day) since 2007.
While some companies are focused on improving working capital
performance, even those find it challenging to sustain
improvements. Only 10 percent of the companies in the REL survey
improved working capital performance for three years running, and
only 2 percent improved it for five years running. Five companies
showed remarkable results, improving working capital for seven
years in a row: AmerisourceBergen, Diebold, EQT, Goodyear, and
Masco.
Several industries, including technology hardware and
biotechnology, appeared to go against the trend, significantly
improving working capital performance in 2014. Industries that
showed the largest decline in working capital performance in 2014
included diversified consumer goods, automobiles, and construction
and engineering.
The REL/CFO Working Capital Survey is the only one of its type
that publishes comprehensive performance information on working
capital and a comprehensive array of underlying metrics for 967 of
the largest companies in the U.S. A similar annual study from REL
looks at performance of the largest public companies in Europe.
The complete data and analysis package for this survey is
available for purchase from REL. More information is available via
email at info@relconsultancy.com
About REL
REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a
world-leading consulting firm dedicated to delivering sustainable
cash flow improvement from working capital and across business
operations. REL’s tailored working capital management solutions
balance client trade-offs between working capital, operating costs,
service performance and risk. REL’s expertise has helped clients
free up billions of dollars in cash, creating the financial freedom
to fund acquisitions, 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 Fortune 500 and global
Fortune 500 companies.
More information on REL is available: by phone at (770)
225-3600; by e-mail at info@relconsultancy.com; or on the Web at
www.relconsultancy.com.
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version on businesswire.com: http://www.businesswire.com/news/home/20150616005337/en/
RELGary Baker, 917-796-2391Global Communications
Directorgbaker@relconsultancy.com
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