Annual survey also identifies an additional $450 billion in potential cash
Atlanta — September 6, 2006 — The top 1,000 U.S. companies liberated $72 billion of cash from working capital in 2005 by enhancing the way they collect bills from customers, pay suppliers and manage inventory, according to results from the 9th Annual Working Capital Survey conducted by Hackett-REL, the Total Working Capital practice of The Hackett Group.
Significant opportunity still remains to increase cash flow through the optimization of working capital, according to Hackett. U.S. companies still have $450 billion unnecessarily locked up in working capital, based on the gap between typical companies and top-quartile total working capital performers in the Hackett-REL analysis.
The Hackett-REL survey, which was unveiled today in the September issue of CFO Magazine, found that the 1,000 largest U.S. companies reduced total working capital by 5.6 percent in 2005. Improvement accelerated dramatically year-over-year, with companies generating 55 percent greater levels of working capital reduction than in 2004.
A complementary study covering Europe, which is being published in the September issue of CFO Europe, reveals that the top 1,000 companies in Europe fell behind their U.S. counterparts in 2005, generating virtually no gains and seeing total working capital performance improve by only 0.5 percent, less than a quarter of the reduction they saw in 2004. The European companies had been playing catch-up with the United States for several years, and in 2004 generated working capital results virtually on par with U.S. companies.
Excluding the automotive sector, which can sometimes skew results because of the large financing arms of the major manufacturers, the top U.S. companies showed a 4.0 percent reduction in total working capital in 2005 (up from 2.5 percent in 2004), while the top 1,000 European companies saw a reduction of only 0.6 percent, (down from 3.3 percent in 2004).
"More than ever before, U.S. companies are seeing the value of improving their total working capital performance," explained Hackett-REL President Stephen Payne. "Executives understand that this is an exceptional way to free up cash that can enhance shareholder returns or be dedicated to funding strategic initiatives such as new product development, penetrating emerging markets, paying down debt, or repurchasing shares. But even with the strides companies have made in the past few years, there's still a tremendous amount of money being left on the table here, especially with 43 industry sectors showing improvement while 35 worsened in 2005. These companies still have far to go.
"Several trends played a role in helping U.S. companies generate the results they did in 2005," said Payne. "It appears that more companies are adding a cash flow performance element to their executive compensation plans, so there are now stronger incentives for business leaders to focus in this area. The greatest improvement this year was in Days Sales Outstanding, in part because accounts receivable is the area of working capital where CFOs have the most influence. Reducing inventory levels, for example, is more of a challenge, as it requires the participation of many other parts of the company and is typically wrapped in far more complex business processes. Finally, many companies are increasing their use of offshore manufacturing, which extends the supply chain and can drive higher inventory levels."