Working Capital Improvement Stalls for First Time in Decade

Top companies could recoup $764 billion by improving how they collect bills, pay suppliers and manage inventory, REL concludes

Atlanta — June 27, 2007 — After nearly a decade of annual reductions in working capital, overall the 1,000 largest U.S. companies outside the automotive and financial sectors showed no improvement in 2006, in large part due to increased inventory as a result of both slowing sales growth rate and increased use of overseas manufacturing facilities, according to results of a recent survey conducted by consulting firm REL and CFO Magazine.

The U.S. survey for the Tenth Annual Working Capital Survey found that the top 1,000 largest publicly traded U.S. companies (by sales) are carrying as much as $764 billion in excess working capital because of inefficiencies in the way in they collect bills from customers, pay suppliers and manage inventory. Typical companies in the survey would need to reduce their overall working capital by 48 percent to achieve the levels seen by top performers.

A parallel survey of total working capital performance at Europe's 1,000 largest publicly traded companies (excluding automakers and financial institutions) found a 6.6 percent improvement over last year, liberating 46 billion euros ($62 billion). But overall total working capital performance by the European companies was still 18 percent worse than that of their U.S. peers.

DSO Improves, DIO Lags

Typical companies in the survey saw "days working capital" (DWC) of 38.8 in 2006, with no change over 2005. There were movements in each of the components of working capital, but overall DWC stalled. This included: days sales outstanding (DSO) of 39.5, representing a 1.2 percent improvement over 2005; days payables outstanding (DPO) of 31.9, a .3 percent improvement over 2005; and days inventory outstanding (DIO) of 31.2, a 2.1 percent deterioration over 2005.

All these data exclude automotive manufacturers, which can sometimes skew results because of their large financing arms. Financial institutions, including banks and insurance companies, are also excluded from the survey due to their limited working capital needs.

The number of industries where companies reduced their overall working capital in 2006 was down by nearly 50 percent compared to 2005. Industries where companies showed the greatest DWC improvement included: hotels; restaurants and leisure; independent power producers and energy traders; construction and engineering; and multi-line retail. Industries where DWC performance degraded the most included: gas utilities; oil, gas and consumable fuels; and diversified consumer services.

Sales Growth Down

"It's difficult to understand why companies are not taking advantage of the opportunity to drive improvements in working capital, as this results in increased levels of cash flow which should be of significant strategic importance," said REL President Stephen Payne. "This is the cheapest source of cash which can be used to enhance shareholder returns or be dedicated to funding strategic initiatives such as paying down debt, building new or additional capacity in low cost regions or repurchasing shares."

According to REL Senior Director Daniel Windaus: "We see two primary factors in this year's poor working capital performance by U.S. companies. First, while sales continued to grow in 2006, the growth rate was down by nearly 25 percent year over year. As a result, companies housed more inventory due to the lag in supply matching the slow down in demand.

"Secondly, we believe this year's poor U.S. performance is tied to a hidden downside of offshore manufacturing," Windaus continued. "As companies source materials or manufacture goods in low-cost countries, the increase in lead times associated with shipping parts of finished products to the U.S. contributes to rising inventory levels. This also hinders the speed with which companies can respond to demand changes, causing levels of obsolete inventory to rise."

To address this problem, Windaus said, companies will have to find the right balance of taking advantage of cheaper product while creating flexibility in their supply chains to respond better to demand changes, both up and down.

More REL analysis of the findings is available (registration required) at