Hackett Study: Working Capital Performance Deteriorates in 2012

The ability of companies to generate cash from operations deteriorated in 2012, as the opportunity for working capital improvement at 1,000 of the largest U.S. public companies rose dramatically, topping $1 trillion for the first time, according to the 15th annual working capital survey from REL Consultancy, a division of The Hackett Group, Inc., and CFO Magazine.

The research, which examines the ability of companies to collect from customers, manage inventory, and pay suppliers, found that as revenue grew by 5 percent in 2012, profitability—as measured by EBIT margin—decreased. At the same time, working capital levels increased by 6 percent, to levels 25 percent higher than three years ago. Actual Days Working Capital remained flat. But cash conversion efficiency deteriorated for the second year in a row, indicating that companies are taking longer to convert sales into cash. In addition, free cash flow, which is a key indicator of the health of corporate cash flows and represents the cash companies are able to generate after laying out money to maintain or expand their asset base, fell by 14 percent year over year, indicating poor cash flow management.

The working capital opportunity at the companies in the study reached nearly $1.1 trillion in 2012, an amount equal to 7 percent of the U.S. gross domestic product. Nearly half of the working capital management gap represents excess inventory being held by typical companies. Overall, top performers in the REL/CFO study now operate with about half the working capital of typical companies. They collect from customers more than two weeks faster, pay suppliers over 10 days slower, and hold less than half the inventory. The research also found that few companies are able to sustain working capital improvements, with less than 10 percent of all companies in the study improving working capital performance for three years running.

Companies continued to borrow to grow their cash hoard in 2012, the study found, with debt rising by 10 percent or over $350 billion, to a total of nearly $1 trillion in cash on hand. At the same time, companies reinvested heavily, with capital expenditures hitting a new all-time high, having risen by 50 percent over the past three years. Companies are also clearly spending in other key areas, including increased dividends, share repurchases, pension contributions, and global expansion.

"The overall ability of companies to manage working capital is clearly continuing to worsen," said Dan Ginsberg, an Associate Principal at REL Consulting. "Companies know how to do better, because they did so during the heart of the recession in 2008, making dramatic improvements in just a single year. But very quickly their focus turned back to growth, and working capital rebounded.

"Truly, if you look at how companies manage working capital more effectively, there's nothing there that conflicts with growth goals." explained Ginsberg. "It's definitely possible to grow revenue and improve cash flow and working capital simultaneously. If your ultimate goal is to increase shareholder value, the least expensive way to do that is by improving working capital management. But few companies manage to make this a priority, and even fewer manage to sustain a focus on working capital long term."

The REL/CFO study is the only one of its type that publishes comprehensive performance information on working capital and a comprehensive array of underlying metrics for 1,000 of the largest companies in the U.S. A similar annual study from REL looks at performance of 1,000 of the largest European companies.

For more information, visit www.relconsultancy.com.

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