US Companies Continue to Play Year-End Games With Receivables, Payables, and
Manipulation Netted $52 Billion Balance Sheet Bump For Over 450 U.S. Companies
In Q4, But Companies Quickly Lost These Artificial Gains and More
MIAMI & LONDON -- October 23, 2012
Many large U.S. companies continue to try and "game the system" at year-end,
artificially improving their balance sheets by manipulating receivables,
payables, and inventory, according to a new study from REL, a division of The
Hackett Group, Inc. (NASDAQ: HCKT). Their efforts, which can range from deep
discounting and extended payment terms on sales to simply "losing" supplier
bills, do have a positive impact in Q4, the study found. But these companies
pay a harsh price in Q1, when working capital performance bounces back to even
worse levels than before.
According to REL's research, which examined the working capital management
performance of 979 of the largest publicly-traded companies in the U.S.,
nearly half of all companies in the study showed evidence of year-end
gamesmanship. These companies improved working capital performance by 10
percent in Q4 2011, adding $52 billion to their balance sheets, or an average
of $111 million per company. But in Q1 of 2012, these same companies saw
working capital rebound dramatically, worsening by 11 percent, or $53 billion,
an average of over $113 million per company.
REL's research found that companies which play year-end games with working
capital can get quite creative in their cash flow management approaches. To
boost receivables, they often increase incentives for sales staff and extend
payment terms to get customers to buy more. At the same time they strong-arm
other customers into paying early. On the payables side, they take a wide
range of actions that put tremendous strain on their supplier relationships.
In many cases, they suddenly start finding discrepancies in supplier invoices,
or other excuses to delay payment. Some simply tell suppliers 'the check's in
the mail,' even if it isn't, or delay receipt of goods they have already
ordered. To reduce inventory, these companies sometimes take the dramatic step
of shipping orders early, regardless of when the customer has asked for them.
In addition to all this, these same companies often keep their factories
running at full capacity whether they need to or not, so they can claim higher
operational efficiency and effectiveness.
REL has been tracking the practice of year-end gamesmanship since 2005.
Significant evidence of year-end gamesmanship was found in each year's working
capital results, with the exception of 2008 and 2009. In these two years
companies were struggling with the impact of the recession and many were left
with significant excess inventory and uncollected receivables at year-end. REL
experts had hoped to see evidence that during the recession companies had put
procedures in place to eliminate year-end gamesmanship. But that does not
appear to have happened. Instead, in 2010 and 2011 companies went back to the
same practices they had pre-recession.
"Rather than develop a strategy to drive sustainable working capital
improvements, these companies play the same games each year, trying to pretty
up their balance sheets to impress analysts and investors," said REL Principal
Michael Rellihan. "But like a rubber band stretched too far, they snap right
back, and by the end of Q1 these companies are worse off than when they
started. Their bad business practices may make them look good in the
short-term, but they have a negative impact on the long-term bottom line."
REL's research also offered recommendations for how companies can avoid the
trap of year-end gamesmanship and instead focus on sustainable working capital
improvements. REL recommended that senior leadership make it clear that
short-term practices designed to improve working capital performance will no
longer be tolerated, and use an audit committee to monitor and track
performance. Working capital management should be made a continuous process.
Compensation structures should be realigned so that sales staff are rewarded
based on the profitability of their sales, and not just the revenue they
generate. Finally, rolling targets should be used for working capital metrics,
to discourage short-term thinking and encourage sustainable improvements.
Readers can download the research, with free registration, at this link:
REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), 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 onREL is available: by phone at (770) 225-7300; by e-mail at
firstname.lastname@example.org; or on the Web at www.relconsultancy.com.
Gary Baker, 917-796-2391
Global Communications Director
Press spacebar to pause and continue. Press esc to stop.