Recession Hit Working Capital Hard in 2009, As Collections Slowed, Inventories Spiked

Up to $740 billion now unnecessarily tied up in working capital at the 1,000 largest public companies in the U.S., REL reports; top performers collect 17 days more quickly, have less than half the inventory

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Atlanta July 6, 2010 — The impact of the global recession made it dramatically harder for the 1,000 largest public companies in the U.S to collect from customers and manage inventory last year, according to the latest working capital management analysis from REL, a division of The Hackett Group and CFO Magazine.

The analysis showed that the largest U.S. companies saw working capital performance deteriorate by over 8 percent in 2009, the largest decline in more than five years. These companies now have up to $740 billion in cash unnecessarily tied up in working capital, which can be freed up by improving their operations in collections, payables and inventory management. This is money that can be used to reduce or eliminate the need for short-term credit, improve bottom line performance, or fund strategic initiatives.

According to REL's research, top-performing companies collected from customers 17 days more quickly than typical companies in 2009. They also operated with less than half the inventory on hand, and stretched payables by an additional 10 days.

"Hunkering Down"

A quarter-by-quarter analysis shows that the recession caused companies to take a large hit to working capital performance in Q1 of 2009. Most were actually able to recover significantly as the year progressed and the economic environment improved. But the dramatic negative impact early in the year left companies' working capital performance far behind 2008 levels, even by year-end.

According to REL President Mark Tennant, the 2009 performance, and the outlook for 2010, is very discouraging. "The economic crisis hit hard last year, and companies hunkered down, focused on cash, and drove improvements in working capital that reduced their need for credit. But we believe most of these efforts were very tactical and short-term, with companies muscling down collections and inventory, and simply holding back payments to suppliers."

Tennant said that few companies made real strategic changes in the way they did business, so any improvements they generated are unlikely to be sustainable. "Now that the worst of the global economic problems are behind us, companies are returning to their traditional mindset, with an emphasis on revenue and profits. Working capital is likely to be placed on the back burner, and we're likely to see further deterioration in performance as we move through 2010."

Payables Improve

REL's research found that U.S. companies took over three days longer to collect from customers in 2009, a rise in days sales outstanding (DSO) of over 10 percent from 2008. Inventory levels, as measured by days inventory outstanding (DIO), rose by nearly 9 percent, in part as a result of the dramatic drop off in sales many companies experienced.

The only working capital metric that improved was payables, as measured by days payables outstanding (DPO), with companies taking 31.7 days to pay suppliers, an improvement of over 11 percent from 2008.

The underlying research and analysis, available for download (with free registration) here, provides more detailed analysis, along with information on the individual performance of all 1000 companies in the study, including industry comparisons and more.