LENB Lennar Corporation (Class B)

By Mark Maurer 

U.S. companies' working-capital efficiency reached a six-year high in 2018 as finance chiefs increasingly prioritize managing inventories to more quickly convert the capital into cash, a new study found.

The 1,000 largest U.S. public companies collected cash from their customers quicker than they had since 2012, according to a study to be released Wednesday by Hackett Group Inc., a consulting firm.

Hackett said it sees more than $1.28 trillion that U.S. companies can trim from their working capital. That figure translates to about 6% of U.S. gross domestic product and marks an approximately 15% year-over-year increase from $1.1 trillion, the study showed.

That money could be deployed to give companies a competitive edge. Companies that wring money from working capital can funnel those funds toward ramping up acquisitions and initiatives that propel growth. A company's working-capital performance can be tied to the performance of its CFO. Finance chiefs are increasingly standardizing processes to track working-capital performance across an organization, to make the most of that funding source.

The top-performing companies paid suppliers almost three weeks slower in 2018 than typical companies and collected cash from customers almost three weeks quicker -- while holding less than half the inventory, data showed. The amount of funds trapped in inventory fell for the first time since 2012 last year. Despite the improvements in the receivable and inventory categories, payables performance deteriorated. Companies have begun to scale back on extending payment terms, thus cutting suppliers some slack.

"Inventories are an untapped area of working capital and they're more difficult to go after than payables," Craig Bailey, associate principal at Hackett, said in an interview. "Companies found there's just not much to be gained going after payment terms."

Of the 1,000 companies surveyed, nine improved their cash-conversion cycle -- a measure of operational efficiency that tracks the speed of converting a transaction into cash -- every year from 2011 to 2018. The companies included PepsiCo Inc., HP Inc., and Lennar Corp, the report showed.

Hackett's survey found that the aerospace, oil-and-gas, and energy services industries struggled the most when it came to working-capital performance last year.

National Oilwell Varco Inc., a Houston-based manufacturer of oil-and-gas production equipment, was among the companies with the largest working-capital opportunity, at $4.5 billion, according to Hackett data provided to The Wall Street Journal.

"When an oil rig gets built, capital sometimes gets stranded," said Marshall Adkins, an analyst at Raymond James & Associates Inc., who follows National Oilwell. "Many of the offshore drilling rigs ordered five or six years ago were stymied in a shipyard."

National Oilwell recognizes the need to improve its management of working capital, CFO and Senior Vice President Jose Bayardo has said on earnings calls, most recently in February. The company is trying to decrease the number of days to convert transactions to cash, Mr. Bayardo said on the call. The company's cash-conversion cycle was 246 days last year, down from 285 the year earlier, Hackett data showed.

Mr. Bayardo couldn't be reached for comment Monday. A National Oilwell spokesman declined to comment.

Write to Mark Maurer at mark.maurer@wsj.com

(END) Dow Jones Newswires

June 25, 2019 08:14 ET (12:14 GMT)

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