Carolina Dybeck Happe
General Electric is serious about getting better at working capital management. On April 1, the industrial giant discontinued a majority of its factoring programs, a significant change in its management of the timing of incoming cash.
GE’s industrial businesses started lowering their receivables sales to factors as early as the beginning of 2019. Since that time, GE has reduced its factoring balance by $8 billion, bringing it down to about $6 billion on March 31.
A year earlier, GE was selling about half of the industrial group’s gross customer receivables to third parties or GE Capital (in arm’s-length transactions). By the end of March 2021, that percentage was down to 38%.
In a factoring program, a business sells its accounts receivable to a third party at a discount. As with any factoring arrangement, when GE’s industrial business sold customer receivables, it accelerated the receipt of cash that would have otherwise been collected from customers.
GE hasn’t said it outright, but it obviously feels more comfortable with its cash flow and its finance department’s collections capabilities, so it doesn’t need to get cash for its invoices immediately. Cutting out factoring also eliminates the interest expense associated with the technique.
“As we reduce our reliance on factoring, we will continue to focus with further improvement on our core billings and collections capabilities, leading to better cash performance over time,” said CFO Carolina Dybeck Happe on the company’s April 27 earnings call.
There are other reasons for GE to stop the use of factoring, however.
Winding Down Financial Services
To focus on core operations, GE is downsizing GE Capital and exiting most of its financial services businesses. It sold off one of the last pieces in early March, jet-leasing business GE Capital Aviation Services, to Ireland’s AerCap Holdings.
The last active financial services business within GE Capital is Working Capital Solutions, the factoring business to which GE industrial (and WCS’s outside clients) were selling some of their receivables. “The decision was pretty clear to … stop that business,” Happe said at a Bank of America investor conference in mid-March.
In addition, GE ran into some problems when it used a technique related to factoring in 2016 and 2017. To combat cash flow problems, the company went beyond its usual practice of just selling short-term (less than one year) receivables. GE power services began selling long-term (up to five years), unbilled receivables, an accounting maneuver known as “deferred monetization.
By the time GE stopped the practice in 2017, GE Power Services had pulled forward $878 million in cash from 2018, $585 million from 2019, $407 million from 2020, and $400 million from later years, according to charges brought by the Securities and Exchange Commission. But the SEC said GE failed to disclose “to investors its adoption and reliance on deferred monetization which increased present industrial cash flow at the expense of future years.”
The case, which involved other accounting irregularities, was settled in December 2020.
‘Self-Help’
Regardless, stopping most uses of factoring and managing working capital closely are paying off. According to Happe, finance has already chopped $4 billion off quarterly cash needs in the span of a year. And it knocked two days of days sales outstanding (DSO) in the first quarter of 2021.
Happe has said she views billing and collections as an end-to-end process, so GE has worked at billing faster. “It’s also about making sure you have a process of collecting money that isn’t, in any way, set up for maybe year-end or quarter-end, but looking at it as a part of daily management,” she said at the BofA conference.
Payables and inventories are also contributing to working capital improvements, according to Happe. “All of the company’s leaders have action plans to run their businesses leaner with lower inventory levels,” Happe said on GE’s fourth-quarter 2020 earnings call.
Stopping factoring, of course, slows down (temporarily) cash inflows from receivables. GE’s free cash flow took an $800 million hit in the first quarter as it wound down its use of factoring. It expects a negative cash flow impact of $3.5 billion to $4 billion the rest of the year, with most of it felt in the second quarter.
But GE sees that as just a minor road bump in a longer-term “self-help” strategy to reach sustainable cash-flow growth. Said Happe: “I’m confident we’re focused on the right areas. … operational cash drivers that improve working capital. … increasing the frequency of our operating rhythms … and more linear cash-flow generation throughout the quarters and the year.”
Analysts are watching the developments closely. Tightly managing cash and reducing the company’s asset base have cut GE’s quarterly outflows — to $845 million in the first quarter, smaller than the average analyst estimate of $1.3 billion and significantly down from $2.2 billion a year earlier.
GE is projecting free cash flow of $2.5 billion to $4.5 billion in 2021. Free cash flow, in particular, is a concern for analysts because it reflects GE’s ability to pay down its large debt load.
