Managing working capital is such an important aspect to business but sometimes it can be an afterthought. This is an area we need to pay more attention to on Supply Chain Today. Through our networking channels we came across some great information from The Hackett Group. We posted discussions on this topic in both our LinkedIn and Facebook groups. We are anxious to hear your thoughts on this topic.
Top performers in working capital now collect from customers over two weeks faster, pay suppliers nearly three weeks slower, and maintain less than half the inventory of typical companies in their industry, according to new working capital research from The Hackett Group, Inc. (NASDAQ: HCKT). Overall, top performers are nearly 3x faster at converting working capital into cash, with a cash conversion cycle (CCC) of only 17 days, nearly 30 days faster than typical companies.
The 2017 U.S. Working Capital Survey, which examined the performance of 1,000 of the largest public companies in the US in 2016, found that typical companies now have more than $1 trillion unnecessarily tied up in working capital. CCC improved by 4 percent in 2016, largely because companies paid suppliers nearly four days (7.6 percent) slower. At the same time, debt increased by nearly $350 billion (7.3 percent). CCC is a standard metric used to quantify the ability of companies to convert invested resources into cash, and incorporates payables, receivables, and inventory.
In a separate research piece, The Hackett Group found a direct relationship between sustained working capital optimization and improved earnings and profitability. By reducing the key working capital metric of cash conversion cycle (CCC) by 7 days, companies can add 1 percent to earnings before interest, tax, depreciation and amortization (EBITDA) margin, increasing profitability by about 20 percent (for a company with an EBITDA margin of 5 percent), the research found.
The annual working capital survey is featured in the current issue of CFO Magazine. A complimentary analysis of the survey results is available, with registration, at this link: https://goo.gl/xSPDvq. The companion research on working capital and profitability is also available free, with registration, at this link: https://goo.gl/lCc0AC
The working capital profitability research used advanced regression analysis to establish the strength of the relationship between working capital performance and improved profitability, and to demonstrate that working capital performance was causing the profitability improvement, and not vice versa. The research examined working capital performance over a 10-year period.
A seven-day reduction in CCC can add an additional 1 percent to EBITDA margin in the top 20 industries, the research found – a striking number given that EBITDA margins in many industries today are in the single digits. In the top 10 industries, the potential impact was even greater, totaling over 2 percent EBITDA margin improvement. Assuming an initial EBITDA of 5 percent, this can represent a 20-40 percent improvement, generating significant cash and improving profitability.
“Overall, it’s clear that most companies still don’t see a pressing need to focus on working capital improvement,” said Veronica Wills, associate principal, North America working capital practice lead, The Hackett Group. “Companies came out of the recession knowing they need cash to survive. But they continue to rely on financial instruments like cheap debt and supply chain financing rather than do the fairly straightforward tactical work of optimizing payables, receivables, and inventory.
“This research provides finance leaders with the ammunition they need to make a business case for working capital improvement,” said Wills. “It tells business leaders precisely how much working capital improvement can be worth on their balance sheet. By making sustainable changes companies can generate real cash that can be used to bolster the bottom line, fund new initiatives and acquisitions, or reduce the need for outside investment.
“It truly takes a village to drive working capital improvement, because sales, procurement, supply chain, and others need to be on board, as they own key parts of the underlying processes,” said Wills. “Cross-functional transformation can be challenging, and the support of corporate leadership is key. We hope finance leaders take this research to their CEOs and COOs, and use it to make the case for change.”
About The Hackett Group
The Hackett Group (NASDAQ: HCKT) is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices implementation firm to global companies, offering digital transformation and enterprise application approaches including robotic process automation and cloud computing. 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 13,000 benchmarking studies with major corporations and government agencies, including 93% of the Dow Jones Industrials, 87% of the Fortune 100, 87% of the DAX 30 and 58% 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.
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