The working capital performance of America’s top 1,000 public companies last year was the best since 2012, according to a study by the Hackett Group

The consulting firm reports that the biggest US corporates collected cash from customers more quickly in 2018 than they had done in six years as chief financial officers (CFOs) gave greater priority to managing inventories and accelerating the conversion of capital into cash.

However, Hackett also identified more than US$1.28 trillion last year that American companies could trim from their working capital – an increase of 15% over the 2017 estimate of $1.1 trillion – and “ignored a proven opportunity to increase profits by as much as 20%”.

The new potential savings figure equates to about 6% of US gross domestic product (GDP) and could instead be deployed for acquisitions and other initiatives to stimulate growth.

The study notes that working-capital performance can be tied to that of its chief finance officer (CFO) and US CFOs are increasingly standardising processes to track performance across the organisation and achieve maximum benefit from that funding source.

Holding on to cash

Hackett reports that the top-performing US companies took almost three weeks longer to pay their suppliers in 2018 than typical companies and collected cash from customers almost three weeks quicker, while holding less than half the inventory.

The amount of funds trapped in inventory fell last year for the first time since 2012. Despite improvements in the receivable and inventory categories, payables performance deteriorated while US companies have begun to scale back on extending payment terms, providing some relief for suppliers some slack.

“Inventories are an untapped area of working capital and they’re more difficult to go after than payables,” commented Craig Bailey, associate principal at Hackett. “Companies found there’s just not much to be gained going after payment terms.”

Nine of the 1,000 companies surveyed by Hackett – including PepsiCo, Hewlett-Packard and construction group Lennar Corp – were able to regularly improve their cash-conversion cycle—a measure of operational efficiency that tracks the speed of converting a transaction into cash—every year between 2011 and 2018.

Hackett’s survey found that the aerospace, oil-and-gas, and energy services sectors struggled the most when it came to working-capital performance in 2018.