Treasury News Network

Learn & Share the latest News & Analysis in Corporate Treasury

  1. Home
  2. Working Capital Management
  3. Inventory Cycle in WCM

USA’s worst WCM performance since 2007-2008: The high cost of low interest rates

Last year, the 1,000 US companies tracked by The Hackett Group’s working capital division borrowed another $413 billion, adding 9.3% to their overall debt level, even though cash on hand stayed essentially the same (up 0.4%). Not only this these companies are now $4.86 trillion in debt, more than double their level of indebtedness in 2008.

Hackett reported in their 2016 US Working Capital Survey that, “Lax working capital management habits learned in these easy credit years are now taking their toll on many companies’ overall operational efficiency:

  • Cash conversion cycle (CCC) performance among the 1,000 companies tracked declined by 2.4 days, or 7%, from the prior year. The 35.5-day CCC average is now higher than it’s been at any time since 2008.
  • Days inventory on-hand (DIO) grew by 10.3%, climbing by 4.6 days to 49.1 days. Much of this deterioration was driven by weakness in the oil and gas and telecommunications sectors, but even excluding oil and gas, DIO still grew 3.7% year-on-year, adding 1.9 days to the previous average of 52.2 days.”

These average mask even greater weaknesses, median companies were:

  • seven times slower at turning their working capital into cash than companies in the top quartile
  • collected from their customers 2+ weeks slower
  • paid their suppliers 2+ weeks faster
  • held over two times more inventory than top-quartile companies.

Hackett estimate that in these median companies, ”by not replicating their competitors’ best practices in working capital, they left over $1.07 trillion on the table – as much as 36.7% of their gross working capital, 10.2% of their revenue – or 6% of the $18.1 trillion US gross domestic product.”

  • **

CTMfile take: Extending terms to 90 or 120 days is not the answer because of the knock-on effect on other companies, tighter control of inventory levels by managing each type, and reducing DSO are essential. It is vital to keep up the pressure on WCM changing and refreshing the team as and when needed.  

Like this item? Get our Weekly Update newsletter. Subscribe today

Also see

Add a comment

New comment submissions are moderated.