The largest U.S. companies saw their ability to extend payments to suppliers, collect from customers and manage inventory degrade in the first half of 2023, according to new working capital research from The Hackett Group, Inc.
“Looking at the overall survey, it’s highly unusual to see all three elements of working capital degrading at the same time. It’s clearly a sign that companies are not highly focused on working capital management. On payables, we’re now seeing even more evidence that the leverage has shifted from the buyer to the seller. Supply assurance has become more important to buyers, and pricing is more critical to them than payment terms. We believe we’ll likely see payables performance at large companies continue to degrade over the coming year,” says The Hackett Group director James Ancius.
“The significant degradation in inventory performance was also a bit surprising. The balance is likely to change in the second half of 2023, with gas exports picking up. But we’re also seeing increases in inventory in areas like recreational products, which is likely tied to reduced consumer demand, and could be an indication of future softening,” adds The Hackett Group director István Bodó.
Key takeaways:
- Rising inventories for utility and semiconductor and equipment companies played a major role in the degraded inventory performance.
- Performance in Q2 2023 compared to Q2 2022 found the most significant decline in days inventory outstanding (DIO), which deteriorated by 7.1% (from 47.2 to 50.5 days). Oil and gas, telecommunication equipment, utilities, and recreational products showed the greatest degradation in inventory performance. Days payables outstanding (DPO) performance declined by 2% (from 55.8 to 54.7 days), led by degraded purchase-to-pay performance in textiles, apparel and footwear, machinery, and consumer durables. Days sales outstanding (DSO) showed marginal degradation of 1% (from 39.8 to 40.2 days), with pharmaceuticals, biotechnology and medical specialties, and services leading the list of industries where performance worsened the most. Overall cash conversion cycle, which aggregates DIO, DPO and DSO performance, deteriorated by 15.4% (from 31.2 to 36 days).
- Companies also saw liquidity metrics stabilize after hitting record highs in Q2 2022. Operating cash flow as a percentage of revenue increased by 12.1% in the first half of 2023, while earnings before interest, taxes, depreciation and amortization margin declined by 8.7%. Net income margin declined by 12.6%. An analysis of operational metrics found that despite the increasing cost of debt, companies increased cash on hand as a percentage of revenue by 1.7% and capital expenditures as a percentage of revenue rose by 15.1%, despite the increasing cost of debt.
