HACKETT: Largest U.S. Companies Take on More Debt, Ignore Opportunities to Improve Working Capital Performance


The largest public companies in the U.S. chose to go even further into debt in 2015 instead of driving cash out of their businesses by improving how they collect from customers, pay suppliers, and manage inventory, according to the new annual working capital survey from REL, a division of The Hackett Group, Inc. Overall working capital performance continued to degrade, reaching poorest performance levels since the 2008 financial crisis.

A significant factor in this year’s overall results was low oil prices, which caused oil and gas companies to increase reserves, dramatically worsening both their inventory and overall working capital performance, and dragging down the performance of the entire survey group.

The survey is featured in the July issue of CFO Magazine. A complimentary analysis of the survey results is available, with registration, at this link: http://bit.ly/29GTF8R.

The survey looks at the performance of 1,000 of the largest public companies in the U.S. during 2015. It saw corporate debt rise significantly for the seventh consecutive year, as a result of low interest rates. Debt was up 9.3 percent this year, or $413 billion. Since 2009 the total debt position of the companies in the survey has increased by over 58 percent.

Working capital performance – which includes collections, payables, and inventory – worsened somewhat, with a deterioration of 2.4 days or 7 percent in Cash Conversion Cycle (CCC), or the ability of companies to turn spending on overhead, raw materials, and labor into cash. It is now at 35.6 days, the worst since before the 2008 financial crisis. CCC is a key measure of working capital performance which factors in how efficient companies are at managing inventory, receivables, and payables.

The working capital improvement opportunity of companies in the survey is now over $1 trillion, or 6 percent of the U.S. GDP. By component the improvement opportunity is: $421B in inventory, $316B in receivables and $ 334B in payables. This opportunity represents the amount of working capital improvement that could be achieved if all companies reached the working capital performance of top quartile performers in their individual industry.

Top performers in REL 1000 (companies in the upper quartile in their industry) are now seven times faster at converting working capital into cash than the typical companies. These companies collect from customers more than two weeks faster, pay suppliers more than two weeks slower, and hold less than half the inventory.

A significant factor in the overall working capital performance of the largest U.S. companies was low oil prices, which drove oil & gas companies to increase reserves. This caused a dramatic worsening of inventory performance among these companies, which make up nearly 10 percent of the overall survey group by revenue. As a result, the oil and gas industry saw its Cash Conversion Cycle (CCC) worsen by nearly 170 percent in 2015, shifting from 4 to 11 days.

“Once again, low interest rates gave companies a perfect excuse to ignore the hard work of optimizing receivables, payables, and inventory, leaving over a trillion dollars unnecessarily tied up in operations. Instead of focusing on transformation most simply leveraged their future with more loans.” said The Hackett Group Senior Director Craig Bailey.

“At the same time, weak oil prices impacted inventory performance at oil and gas companies. The West Coast port strike, which ended in early 2015, was probably also a contributing factor to this year’s results, as it caused goods to pile up in warehouses. Companies took much of last year burning off those inventories,” said Mr. Bailey.

According to The Hackett Group Director Ben Michael, “Eventually, interest rates will rise again, and there are signs this may happen soon. Then many companies may find themselves in dire straits, after seven years of growing debt and worsening working capital performance. Smart companies are getting out ahead of the curve now, and starting making the changes they need to squeeze unnecessary cash out of these key areas.”

In the entire survey group, inventory performance worsened significantly, and was the largest factor in the overall working capital deterioration. Days Inventory Outstanding increased by over 10 percent, and rose to over 49 days.  Days Sales Outstanding (collections) worsened by only 1.1 percent, and Days Payables Outstanding (payables) improved by over 5 percent.

Few companies have been able to sustain working capital improvements, the survey found. Only 2 percent of the companies in the study improved CCC for five years running. Only four improved CCC every year during the past seven years (Goodyear, Priceline, Kimberly-Clark, and AmerisourceBergen).

The REL/CFO Working Capital Survey is the only one of its type that publishes comprehensive performance information on working capital and a comprehensive array of underlying metrics for 1,000 of the largest companies in the U.S. A similar annual study from REL looks at performance of the largest public companies in Europe. The survey relies in part on certain aggregated public data from FactSet.

About REL
REL, a division of The Hackett Group, Inc. is a world-leading consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. REL’s tailored working capital management solutions balance client trade-offs between working capital, operating costs, service performance and risk. REL’s expertise has helped clients free up billions of dollars in cash, creating the financial freedom to fund acquisitions, product development, debt reduction and share buy-back programs.  In-depth process expertise, analytical rigor, and collaborative client relationships enable REL to deliver an exceptional return on investment in a short timeframe. REL has delivered work in over 60 countries for Fortune 500 and global Fortune 500 companies.

More information on REL is available: by phone at (770) 225-3600; by e-mail at info@relconsultancy.com; or on the Web at www.relconsultancy.com.


About The Hackett Group
The Hackett Group is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices implementation firm to global companies. ‎Services include business transformation, enterprise performance management, working capital management, and global business services. ‎ The Hackett Group also provides dedicated expertise in business strategy, operations, finance, human capital management, strategic sourcing, procurement, and information technology, including its award-winning Oracle EPM and SAP practices.

The Hackett Group has completed more than 11,000 benchmarking studies with major corporations and government agencies, including 93% of the Dow Jones Industrials, 86% of the Fortune 100, 87% of the DAX 30 and 52% of the FTSE 100.‎ These studies drive its Best Practice Intelligence Center™ which includes the firm’s benchmarking metrics, best practices repository, and best practice configuration guides and process flows, which enable The Hackett Group’s clients and partners to achieve world-class performance.

More information on The Hackett Group is available at: www.thehackettgroup.com, info@thehackettgroup.com, or by calling (770) 225-3600.

About Author

Procurement and Supply Australasia (PASA) is the leading provider of information and education to procurement and supply professionals throughout Australia and New Zealand. PASA supports the largest community of engaged procurement stakeholders in the region, through its renowned series of events, publications, awards, plus various community and network building activities. PASA is a trading name of BTTB Marketing, for many years recognised as the leading producer of conferences and events for the procurement profession in Australia and New Zealand. Whether producing under the BTTB, CIPSA Conferences or now PASA brands over the last ten years, our events have consistently led the market in terms of both educational and networking opportunities.

Leave A Reply