Working Capital Performance Deteriorates in 2012 As Opportunity at Largest
U.S. Companies Now Tops $1 Trillion
Despite Revenue Growth, Study Sees Challenges in Working Capital and other
Financial Areas; Rising Costs, Shrinking EBIT, Falling Free Cash Flow
MIAMI & LONDON -- June 6, 2013
The ability of companies to generate cash from operations deteriorated in
2012, as the opportunity for working capital improvement at 1000 of the
largest U.S. public companies rose dramatically, topping $1 trillion for the
first time, according to the 15th annual working capital survey from REL
Consultancy, a division of The Hackett Group, Inc. (NASDAQ:HCKT), and CFO
The research, which examines the ability of companies to collect from
customers, manage inventory, and pay suppliers, found that as revenue grew by
5 percent in 2012, profitability -- as measured by EBIT margin -- decreased.
At the same time, working capital levels increased by 6 percent, to levels 25
percent higher than three years ago. Actual Days Working Capital remained
flat. But cash conversion efficiency deteriorated for the second year in a
row, indicating that companies are taking longer to convert sales into cash.
In addition, free cash flow -- which is a key indicator of the health of
corporate cash flows and represents the cash companies are able to generate
after laying out money to maintain or expand their asset base -- fell by 14
percent year over year, indicating poor cash flow management.
The working capital opportunity at the companies in the study reached nearly
$1.1 trillion in 2012, an amount equal to 7 percent of the U.S. gross domestic
product. Nearly half of the working capital management gap represents excess
inventory being held by typical companies. Overall, top performers in the
REL/CFO study now operate with about half the working capital of typical
companies. They collect from customers more than two weeks faster, pay
suppliers over 10 days slower, and hold less than half the inventory. The
research also found that few companies are able to sustain working capital
improvements, with less than 10 percent of all companies in the study
improving working capital performance for three years running.
Companies continued to borrow to grow their cash hoard in 2012, the study
found, with debt rising by 10 percent or over $350 billion, to a total of
nearly $1 trillion in cash on hand. At the same time, companies reinvested
heavily, with capital expenditures hitting a new all-time high, having risen
by 50 percent over the past three years. Companies are also clearly spending
in other key areas, including increased dividends, share repurchases, pension
contributions, and global expansion.
"The overall ability of companies to manage working capital is clearly
continuing to worsen," said Dan Ginsberg, an Associate Principal at REL
Consulting, a division of The Hackett Group. "Companies know how to do better,
because they did so during the heart of the recession in 2008, making dramatic
improvements in just a single year. But very quickly their focus turned back
to growth, and working capital rebounded.
"Truly, if you look at how companies manage working capital more effectively,
there's nothing there that conflicts with growth goals," explained Mr.
Ginsberg. "It's definitely possible to grow revenue and improve cash flow and
working capital simultaneously. If your ultimate goal is to increase
shareholder value, the least expensive way to do that is by improving working
capital management. But few companies manage to make this a priority, and even
fewer manage to sustain a focus on working capital long term."
The REL/CFO study is the only one of its type that publishes comprehensive
performance information on working capital and a comprehensive array of
underlying metrics for 1000 of the largest companies in the U.S. A similar
annual study from REL looks at performance of 1000 of the largest European
companies. More details on the research findings are available in the CFO
Magazine story, available online at:
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
email@example.com; or on the Web at www.relconsultancy.com.
Gary Baker, 917-796-2391
Global Communications Director
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