Working Capital Performance On The Rise

August 1, 2022

For the first time in a decade, the 1000 largest public companies in the U.S. improved performance of all three major working capital components last year – they managed inventory more effectively, collected from customers faster, and took longer to pay suppliers, according to the 2022 Working Capital Survey from The Hackett Group. But despite this triple improvement, the overall working capital improvement opportunity increased substantially.

After a tumultuous year in 2020, which saw major operational and financial disruptions across most industries, performance and liquidity did more than just move back to pre-pandemic levels in 2021. The three key measures of working capital – days payables outstanding (DPO), days sales outstanding (DSO), and days inventory outstanding (DIO) – all trended positively for the year. DPO improved by .5%, from 61.9 days to 62.2 days. DSO improved by 2%, from 41.7 days to 40.6 days. Finally, DIO improved by 2%, from 56.7 days to 55.7 days.

Spurred by a 22% increase in revenues as companies bounced back from the early stages of the pandemic, companies also saw a 12% improvement in EBITDA margins, a dramatic increase following a 4% drop in 2020. “Companies managed to remain profitable despite raw material and labor pressure, accelerating their digital transformation to improve productivity, and reconfiguring their offerings to maintain profitability,” said The Hackett Group Director István Bodó.

Excess working capital grew substantially in 2021, far outpacing the revenue increase. According to The Hackett Group’s analysis, the top 1,000 companies have nearly $1.7 trillion tied up in excess working capital. That’s up 28% from $1.29 trillion in 2020. The opportunity includes $627 billion in inventory, $533 billion in receivables, and $498 billion in payables.

Top performers by industry now convert cash more than 3x faster than typical companies (15.8 days versus 46.2 days). They collect from customers 43% faster (in 27.8 days versus 48.7 days), hold 58% less inventory (28.1 days versus 67.7 days) and take 50% longer to pay suppliers (76.6 days versus 51.2 days)

Cash on hand as a percentage of revenue fell by 23% last year, after a sharp increase to 13% in 2020, putting it now back near pre-pandemic levels. Companies also saw a 17% decrease in debt as a percentage of revenue, indicating that companies have been using the cash they have hoarded during the pandemic to enhance their operational and financial performance.

“The improved metrics of 2021 are encouraging, but they are contrasted by a significant increase in total excess working capital,” said The Hackett Group Director Shawn Townsend. “That opportunity -- combined with ongoing uncertainties and disruptions ranging from high inflation, growing interest rates, geopolitical issues and the ongoing pandemic -- means that companies cannot take their foot off the gas when it comes to working capital management. Prudent companies will not just fine-tune their inventory, receivables, and payables strategies. They will also double down on capabilities for managing working capital health – increasing their visibility into key indicators, sharing information better across functions, and automating processes – to enable agility amid continuing change.”

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