Cash Flow

CFOs Hunt for More Cash: 2022 Working Capital Scorecard

Inflation and higher interest rates make striving for working capital efficiency critical. But they also make it tougher.
Vincent Ryan
Vincent Ryan
July 13, 2022
CFOs Hunt for More Cash: 2022 Working Capital Scorecard
Photo: Getty Images

When the cost of debt and equity rises, smart CFOs know they need to find capital in other places. So, they look for the nooks and crannies where excess cash may be hiding. That inevitably leads them to working capital — the funds regularly tied up in accounts receivable, accounts payable, and inventories.

As benchmark interest rates increase in the United States, releasing cash from financial operations will become even more attractive. Given the economic climate, expect many companies to tighten up on working capital this year — for example, shortening customer payment terms (if possible), putting more energy into collecting overdue accounts, and avoiding overstocking through better projections of customer demand.

After a disruptive pandemic, companies have a jump on upping working capital efficiency: The cash conversion cycle (CCC) of the top 1,000 publicly held nonfinancial U.S. companies fell to 34.2 days in fiscal year 2021, down from 36.5 the prior year, according to this year’s CFO/The Hackett Group Working Capital Scorecard.

The CCC metric expresses the time (in days) it takes for a company to convert investments in inventory and other resources into cash flows from sales. The CCC equation is days sales outstanding plus days inventory outstanding minus days payable outstanding (DSO + DIO – DPO). 

A study of working capital performance run annually for two decades, The Hackett Group Working Capital Scorecard showed CCC improved last year because days sales outstanding (DSO) fell by 1.1 days and days inventory outstanding (DIO) dropped by 1 day, reversing increases in 2020. A slight increase in DPO last year also helped. (See the chart, All Metrics Trend Positively.)


“It was a very unique year, what we call a triple crown event,” said Hackett Group Director Shawn Townsend. “The three working capital metrics are trending positively for the first year since 2010.”

The question now is, how much better can companies do in 2022, especially in a highly inflationary economic climate still suffering from breakages in supply chains?

DPO: Harder from Here

Days payables outstanding, the time it takes for companies to pay invoices from trade creditors, hit an all-time high in 2021. The measure has been rising gradually over the past decade, as customers sat on invoices and bills for longer periods. Companies paid their suppliers in about 48 days in 2009; by 2017, DPO was up to 56 days. Last year, DPO hit a historical high — 62.2 days, more than two full months. (See the chart, Stretching Payments.) 

“DPO has always been the shining star of the three components of working capital because it’s arguably easier to influence,” said Townsend. That’s especially true if a company has a lot of leverage over its suppliers. 

The improvement in DPO 2021 was only slight, however. Outside of DPO jumping 4.7 days in 2020, as companies in dire cash positions tried to maximize liquidity, DPO improvement has slowed.

For one, supply chain bottlenecks have forced buyers to requisition goods at terms and conditions more favorable to sellers, according to The Hackett Group’s scorecard report. Second, companies in some industries may be reaching the upper limit of payment terms extension.

With businesses diversifying their suppliers and in some cases still competing for scarce parts (e.g., semiconductors), buyers have lost some of their sway over payment terms and conditions, Townsend said.

DSO: Economic Assist

The largest opportunities to release cash from working capital and speed up cash conversion lie in receivables and inventory.

DSO, the time it takes to collect payment for a sale, dropped by 1.1 last year, to 40.6 days. DSO has not been consistently under 40 days since 2014-2016 and has hovered in a tight range since 2016. The trend is not surprising, given buyers’ keen efforts to stretch out payment schedules.

Of the 50 industries Hackett analyzed for 2021, 31 improved DSO. Some of the biggest improvements in DSO came from airlines (19%), machinery (19%), and recreational products (17%) — “all industries with a strong business-to-consumer component that fare well with an economic rebound,” said Hackett Group Director István Bodó.

General Electric, though heavily business-to-business, dropped its DSO to 101 days from 156 in 2021. The industrial giant quit most of its factoring programs in April 2021 in favor of building its internal billings and collections capabilities.

The development of e-commerce channels and capabilities in a wider swath of industries is also having a positive impact on working capital, said The Hackett Group’s Shawn Townsend.

Among automakers, which on average reduced DSO by 11% last year, Tesla performed the best, shortening DSO to 13 days from 22 days. Tesla’s net working capital (current assets minus current liabilities) has been billions of dollars in the negative for a few years, so the company has worked at “strengthening core operations” to improve the timing of cash flows.

Clearly, the DSO performance of the 1,000 companies benefited from the quick economic recovery. Some companies that temporarily extended payments to boost liquidity during the pandemic were forced by suppliers to return to more standard terms in 2021, Townsend said. The development of e-commerce channels and capabilities in a wider swath of industries is also having a positive impact on working capital, he said.

But due to economic uncertainty on multiple fronts, this year CFOs need to review credit risk management policies and traditional credit and collections management processes, “to ensure agility in capturing changing payment behaviors, minimizing exposure to bad debt,” said Hackett analysts.

DIO: Lingering Supply Problems

Inventory levels for the 1,000 studied companies grew 17% in 2021, as “companies increased production and pulled forward orders into 2021,” according to The Hackett Group report. But the surge in consumer demand after the heights of the pandemic helped cut DIO by 1 day, to 55.7. That reversed the trend evident in 2019 and 2020, when DIO rose by 1.4 days and 3.3 days, respectively.

No doubt, companies want to cut DIO again this year and get a better handle on how much inventory they need in this economy. As CFO wrote a year ago, “expectations of inflation [and] of increasing interest rates … should drive more of a focus on inventories because this is where a lot of the cash is locked up.”

However, many supply chains are still bottlenecked, which will complicate CFOs’ efforts.

Home appliances company Carrier Global kept its DIO flat in 2021, a notable feat because it faced higher materials costs; the need to amass some safety stock, and, said CFO Patrick Goris in December 2021, the inability to ship products due to parts shortages.

“We may have 99% of the components to ship something. We’re waiting for that 1% to come in. And so that’s impacting our working capital,” Goris said at a Credit Suisse investment conference, per S&P Capital IQ.

At the time, Carrier expected lower inventory needs in 2022 to be a tailwind for working capital management. But as of the company’s April first-quarter earnings call, Carrier was still waiting on the expected boost. Higher amounts of safety stock was still the norm, and missing components were still delaying shipments, Goris said.

In food and staples, the average DIO increased by three days, driven by 14% higher inventory levels. The picture might not get any better this year, according to Hackett Group analysts. (See the chart, The Best at Moving Inventory.)

“Inventory levels across the industry increased due to strong consumer demand and heavy stockpiling by retailers to keep costs down and protect margins in anticipation of historic food price increases,” according to the Hackett report. “As food prices are expected to further increase due to inflation, inventory levels most likely will maintain an upward trend.”

End-to-end reviews of supply chains, already in the works at many organizations, are a must for 2022. In particular, CFOs must ensure any change in customer demand signals are rapidly recognized and captured, and then communicated across the company, said Townsend. Risk assessments conducted on cash, cost, and service implications need to accompany those reviews.

While companies can pull levers like finding new sources of supply closer to the customer to lower inventory balances, at present most are just managing supply chains for the short term. 

The prevalence of economic and geopolitical uncertainties makes it difficult (and perhaps unwise) “to really plan for the long term,” Townsend said.

The Hackett Group Working Capital Survey and Scorecard calculates working capital performance based on the latest publicly available annual financial statements of the 1,000 largest nonfinancial companies with headquarters in the United States, sourced from FactSet/FactSet Fundamentals.