Working Capital

Working Capital Scorecard: A Tumultuous Year

Many CFOs faced challenges collecting cash and keeping a lid on inventories as the pandemic raged and then subsided.
Vincent RyanJune 17, 2021

Shortfalls in revenues, curtailed or redirected customer demand, liquidity pressures, receivables collection headaches  — on the working capital front, 2020 put finance departments to the test.  How did the largest U.S. companies perform overall?

Many, especially those with market clout, improved their working capital performance and stayed plenty liquid. Still, for others, a pandemic-disrupted economy meant too much capital tied up in day-to-day trading operations.

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The cash conversion cycle (CCC) for the largest 1,000 companies increased to 33.7 days in 2020 from 33.1 in 2019, according to the annual CFO/The Hackett Group Working Capital Scorecard.

The cash conversion cycle reflects how effectively companies convert resources to cash. (The equation is days sales outstanding plus days inventory outstanding minus days payables outstanding.)

The surprise is that CCC didn’t worsen more than that, given poor inventory management and slower receivables collection overall. Both those components of the CCC deteriorated.

Companies that kept overall working capital metrics near steady did so by stretching out payment terms to suppliers. This tactic seems to get more popular every year of the scorecard. The problem is it puts financial pressure on those companies’ suppliers.

For the 1,000 U.S. companies in the survey, days payable outstanding (DPO, the number of days companies take to pay their suppliers)  increased by 7.6% to an all-time high of 62.2 days, up from 57.8 days in 2019. It was the largest one-year jump in five years.

While some organizations like those in the pharmaceuticals and internet services and software industries supported their suppliers due to their own favorable cash positions, shrinking revenues in many sectors pushed DPO to the limit, says Craig Bailey,  associate principal, strategy and business transformation at The Hackett Group.

Says Bailey: “Some companies that had cash on their books held terms or even gave their suppliers [more] favorable terms, but those in dire cash positions made suppliers wait. [The] hospitality [industry] had no revenue coming in, for example. Any companies in retail, particularly textiles, apparel, and footwear, likewise tried to conserve liquidity.”

Meanwhile, those same revenue-strapped companies were making a concerted effort to pull in cash, he says. “On the DSO side, companies were chasing overdue accounts receivable where they could, and we saw all hands to the pump there.”

However, overall DSO deteriorated by 3.8%, to 41.5 days, another all-time high for the survey. In 34 out of 50 industries, companies saw their DSO performance slip. Accounts receivable and DSO were also impacted by reduced revenues in traditional sectors like airlines, automotive parts & aftermarket, hotels and recreation, and consumer durables.

However, lockdowns and commercial closures drove DSO gains in some emerging industries like internet & catalog retail. The increase in subscription services and business-to-consumer sales channels in these sectors allowed them to grow revenue while maintaining DSO performance. (See chart, “Sales Into Cash.”)

Meanwhile, product turnover fell, forcing companies to hang onto their inventories longer and pushing overall days inventory outstanding (DIO) up by 7.1 %, to 54.4 days.

Disrupted demand and unsold products drove inventory to higher levels. Facility and pandemic-related commercial closures meant reduced demand, supply chain disruption, and a seasonal shift as demand rebounded. Some companies responded by consolidating their offerings or otherwise simplifying their mix of products.

But inventory optimization problems will likely continue in 20201. This part of working capital has historically been difficult for companies to optimize, and pandemic effects still cloud the demand picture in some markets.

Winners and Losers

While the overall scorecard numbers were unimpressive, there were some winners in working capital efficiency. The best working capital performers converted cash three times faster by deferring payments for roughly 76 days versus 49 days at medium-performing companies. At the same time, they collected cash 41% more quickly — in 29 days versus 49 days, and held inventories for less than half the time — 29 days versus 62 days.

Shifts in demand from the pandemic decidedly improved working capital in sectors that catered to consumers staying at home, boosting revenues, reducing inventories, and improving CCC.

Shifts in demand from the pandemic decidedly improved working capital in sectors that catered to consumers staying at home, boosting revenues, reducing inventories, and improving CCC. The sectors benefiting included household and personal care providers (113% year-over-year CCC improvement), media (106% improvement), and internet and catalog retail (65% improvement).

Not surprisingly, on the opposite side of the spectrum, the pandemic was particularly damaging to sectors reliant on travel and on those that counted on supply chains operating smoothly. For example, in 2020, airlines saw a 903% year-over-year deterioration in CCC. CCC fell by 47% in hotels and recreation, and CCC in railroads and trucking declined by 25%.

Hoarding Cash

Against the backdrop of uncertainty in 2020, the studied companies’ liquidity hit record levels. According to The Hackett Group, as companies sought to minimize risk and prepare for potential opportunities, cash on hand for the 1,000 largest U.S. companies rose to $1.7 trillion in 2020 — a whopping 40% increase over 2019. Debt fueled much of the rise, as it increased by 10% year over year. Only 9 of the 50 industries studied did not increase their debt levels in 2020. A reduction in capital investment also played a role.

Run annually for two decades, the CFO/The Hackett Group Working Capital Scorecard calculates the working capital performance of the largest non-financial companies based in the United States. The Hackett Group pulls the data on these 1,000 companies from the latest publicly available annual financial statements.

For more on this year’s Working Capital Scorecard, see “Working Capital: Inventories, Receivables Need Attention.”

See How Working Capital Works for the scorecard’s approach to calculating, CCC, DSO, DPO, and DIO.

Charts: CFO/The Hackett Group 2021 U.S. Working Capital Survey

Ramona Dzinkowski is a journalist and president of RND Research Group.