The largest U.S. companies found it much harder to extend payments to suppliers in 2022, and have likely hit a ceiling on the practice of supplier payment terms optimization that has historically helped them bolster their balance sheets, according to recent working capital research from The Hackett Group.
An analysis of data from 1,000 of the largest U.S. public companies by The Hackett Group showed that in 2022 days payable outstanding (DPO), or the number of days companies take to pay suppliers, decreased by nearly five days, or 8%.
After a rare Triple-Crown event in 2021, where companies saw improvement in all three working capital management metrics – receivables, payable, and inventory – companies saw their overall working capital performance or cash conversion cycle (CCC) worsen by 3% in 2022, as they faced major headwinds such as inflationary pressure on costs, supply chain disruptions and increased geo-political instability.
While receivables (days sales outstanding or DSO) improved by 5% and inventory levels (days inventory outstanding or DIO) improved by 3%, the improvements were eclipsed by the significant degradation in payables (days payables outstanding or DPO).
Contributing factors to the improvement in inventory performance (DIO) were strong demand that depleted inventory levels and lessons learned during the pandemic, which has led best-in-class companies to take a more strategic approach to inventory management and rely on technology to optimize inventory amid sustained and shifting customer demand, the research found.
Receivables (DSO) performance improvement was mainly driven by double-digit improvements in consumer durables, recreational products, airlines, and oil and gas, which saw strong demand as a result of continued economic rebound. DSO in other industries benefited from the expansion of subscription models and business-to-consumer sales channels as those continue to alter the customer/supplier dynamic and positively impact receivables performance.
These U.S. companies now have almost $1.9 trillion tied up in excess working capital, the research found, including $666 billion in excess inventory, $665 billion in payables, and $531 billion in receivables. Top performers now collect from customers 42% (19 days) faster, hold 59% (41 days) less inventory, and take 52% (25 days) longer to pay suppliers.
Overall revenue growth continued to exceed normal levels in 2022, increasing by 15%, slower than last year but still far exceeding the 4% to 5% annual average growth pre-pandemic, the research found. Earnings before interest, taxes, depreciation and amortization (EBITDA) margins saw an unusual 3% decline in 2022, as raw material and labor pressure offset any gains in the last two years through digital transformation and other efforts. Cash on hand as a percentage of revenue also dropped by 19%, nearly returning to pre-pandemic levels, as companies used cash hoarded during the pandemic to improve operational performance and pay off debt.
The research, which looks at performance by company and by industry, found the strongest working capital improvements in several industries: airlines; hotels, restaurants and recreation; oil and gas; and wholesale distributors. Industries where companies saw the greatest degradation of working capital performance included: motor vehicles; semiconductors and equipment; computer hardware and peripherals; and household and personal care.
According to The Hackett Group Director Shawn Townsend, “After the ‘great working capital reset’ of 2021, this is a year of course correction and growth, despite significant challenges in the business environment. As we predicted in mid-2022, it appears that companies have reached an inflection point in their ability to improve their balance sheet by extending payments to suppliers. For a decade or more, this practice has been the easiest way for companies to improve their working capital performance, and companies have heavily relied on it. But now, supply assurance is a bigger challenge than ever for most companies, with many facing issues related to supplier criticality, competition for resources and the availability of supply.
“We expect this trend of worsening payables performance to continue in 2023, especially as the restructuring of several major regional banks will likely lead to less availability of supply chain finance assets,” said Townsend. “In addition, the new accounting disclosure rules introduced by the Financial Accounting Standards Board (FASB) requiring companies to disclose information about their supply chain finance programs has softened the demand for such tools.”
The Hackett Group Director István Bodó added “It’s interesting to note that the working capital performance gap between typical companies and top performers continues to widen, driven by the degradation of the median performers rather than the improvement of the top performers as seen in previous years. The ratio of top-to-median performance usually traded at an average of ~2.95 in the last few years has now widened by 10% to reach 3.30.”
“With higher interest rates, persistent inflation, continued market unpredictability and many of the other major challenges companies are facing, companies must focus on optimizing working capital if they are to remain competitive long term,” said Bodó. “Cash flow management should be a top priority on the corporate agenda to provide liquidity for strategic investments.”
