The High Cost of Low Interest is the title of The Hackett Group’s US Working Capital Survey. The survey is available here. The survey is free to download, but registration is required. Hackett’s 2017 survey will be available later this year.
James Daly, CEO of Euler Hermes Americas, published an article in CFO.com based on the earlier survey. Since we know that the Fed’s intent is to keep raising interest rates, left unchecked current practices are going to grow increasingly costly.
Both the survey and the CFO article are worth reading. The survey’s conclusion is that “lax working capital management habits learned in easy credit years are starting to take a toll.”
The survey calculates working capital based on the latest publicly available annual financial statements of the 1,000 largest listed non-financial companies in the United States, according to statistics gathered by FactSet. The study reveals that in 2016, the 1,000 US companies borrowed another $413 billion, adding 9.3% to their overall debt level, even though cash on hand stayed essentially the same (up 0.4%).
These 1,000 companies are $4.86 trillion in debt, more than double their level of indebtedness in 2008. The study notes “that might not seem too worrisome given the continued low interest rates, which have fallen from low (3%) to almost zero (0.12%), but we believe many firms are now beginning to pay the price for all that low-interest money. This year’s survey suggests that they paid the first installment in 2015 in the form of the worst working capital performance since the 2007-2008 financial crisis.”
Specifically, Cash Conversion Cycle (CCC) performance among the 1,000 companies 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 figures don’t tell the full story. “Median companies were seven times slower at turning their working capital into cash than companies in the top quartile,” notes the survey. “They collected from their customers 2+ weeks slower, paid their suppliers 2+ weeks faster and held over two times more inventory than top-quartile companies. We estimate that 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.”
These stats spell opportunity regardless of company size. While these references relate to the largest players the fact is that medium and large enterprise have lots of upside opportunity to reduce their DSO and free up their working capital right now. Working capital tied up in the form of receivables is expensive, unproductive and unnecessary. Technology in the form of AR automation can be deployed to leverage this opportunity. Given the rising cost of capital now is the time!