Working Capital Hit

The COVID-19 economic downturn affected many areas of business, including working capital management. A recent survey by the Hackett Group highlights some of the effects. For example, for the largest 1,000 publicly traded U.S. companies, the receivables period increased 1.5 days, the payables period increased 4.4 days, and the inventory period increased 4 days. The interview with Craig Bailey of the Hackett Group is an interesting read as to how the economic turmoil affected business.

GE Kicks Factoring

General Electric is serious about reducing the company's use of factoring. In 2018, the company factored about one-half of its receivables, but it expects eliminate all factoring in the near future. In 2016, the company even went so far as to sell receivables up to 5 years ahead of sales in order to increase the then current cash flow. A consequence of eliminating factoring is is that it will reduce cash flows this year. In fact, GE expects cash flows for 2021 to take a hit of $3.5 to $4 billion, but it will also reduce the interest paid on factoring. The elimination of factoring is also a signal that GE management is confident of future cash flows.  

2018 Working Capital Survey

The Hackett Group has released the 2018 US Working Capital Survey. Overall, working capital management has improved, with the cash conversion cycle dropping to 33.8 days, a 4 percent improvement. Day's payable has increased from 53.5 days in 2016 to 56.7 days in 2017, while days' payables outstanding increased from 37.8 days to 39.5 days. The inventory period also increased slightly, from 50.7 days to 51 days.

2018 Alexander Hamilton Awards

The 2018 Alexander Hamilton Awards from Treasury & Risk have been announced. The gold award went to Herc Rentals, which set up a treasury group to sales for a billion-dollar company less than six months after its divestiture from Hertz. The silver award went to Avery Dennison which centralized its European treasury functions, resulting in significant savings, and improved foreign exchange processes. Finally, OpenText was awarded the bronze award for streamlining its treasury and setting up processes for the integration of future acquisitions.

2016 Working Capital Survey

CFO just published the 2016 working capital survey by REL Consulting. The 1,000 large U.S. companies included in the survey had about $1 trillion in excess working capital based on companies in the survey matching the top quartile performers. Overall, the cash conversion cycle increased by 2.5 days, although much of this was driven by the oil & gas sector. If this sector was excluded, the cash conversion cycle actually fell by .1 day.

The best performer in the cash conversion cycle was Murphy Oil a negative 463 days due to a payables period of 600 days! Some of the other top performers in the cash conversion cycle were Noble Energy (negative 295 days), ITC (negative 282 days), Anadarko Petroleum (negative 245 days), and Apple (negative 66 days). On the other end of the performance scale, some of the longest cash conversion cycles were at United Therapeutics (794 days), Zoetis (344 days),  Eli Lilly (277 days), and KLA-Tencor (246 days).

2016 CFO Goals

A recent survey by Proviti asked CFOs about top priorities for 2016. At the top of the list was margin and earnings performance. Next on the list was cybersecurity risks, strategic planning, periodic forecasting, and budgeting. Executives are also seeking more precision in cash forecasting, an often overlooked area. From a student's point of view, the list of priorities can indicate areas in which they could hopefully make an immediate contribution to their employer.

Months' Payables Oustanding

Days' payables outstanding is frequently used to determine if a company pays its bills slowly, yet for for some companies, months' payables outstanding may be a better measure. CFO recently discussed 45 publicly traded companies that had an average days' payables outstanding of 212.3 days. The longest had a days' payable of 585.9 days, or almost 20 months!  Although the article touts a long payables period as beneficial because "the company is able to deploy cash to other uses," it is also forcing the company's suppliers to finance part of the company's operations.

2014 Working Capital Survey

CFO just published the 2014 working capital survey by REL Consulting. The report indicates that the average days working capital decreased only .2 days over the past year. REL's analysis indicates that the 1,000 large U.S. companies included in the survey could reduce payables and receivables by $266 billion and $331 billion, respectively. While efficiency in short-term financial operations will help profitability, the lack of improvement in working capital management in recent years is likely due to the low interest rate environment. Some of the better performers in day's working capital outstanding include Murphy Oil (negative 60 days), Linn Energy (negative 50 days), Anadarko Petroleum (negative 45 days), and Dell (negative 23 days).

2014 Alexander Hamilton Awards

Treasury & Risk has announced its annual Alexander Hamilton Awards, named after the first United States Secretary of the Treasury. The awards  are given to companies that best improve working capital performance. For example, CoreLogic received the award for streamlining tax payments and improving the management of its cash balance. General Motors also received accolades for better pooling its cash balances. Honeywell's treasury department's award was for better financing subsidiaries in China. To listen to this year's winners describe their projects, you can follow this link to Treasury & Risk's webcast.

A/R For Private Companies

It is difficult to find reliable information on private companies, but a recent survey indicates that private companies across all industries have to wait an average of 40.3 days on receivables, the longest receivables period since it was 40.9 days in 2009.

2013 Working Capital Survey

CFO just published the 2013 working capital survey by REL Consulting. The 1,000 large U.S. companies included in the survey had more than $1.1 trillion in excess working capital. Given the recent attention to large cash balances, this is not surprising. But, what may be more surprising is that 43 percent of the excess working capital is tied up in inventory. Net working capital increased 6 percent over the past year, and has increased 25 percent over the past three years. Only 16 companies in the 1,000 were able to avoid a 5 percent decrease in efficiency over the past three years in at least one of the important metrics: day's sales outstanding, day's inventory outstanding, or day's payable outstanding. Some of the better performers in day's working capital outstanding include Linn Energy (negative 63 days), Noble Energy (negative 54 days), Dell (negative 22 days), and Apple (negative 22 days).

Receivables Factoring

Many small business are strapped for cash. Banks are often reluctant to lend money to a company with an unproven track record and few assets, and while venture capital may be available, it is generally expensive. For online advertiser EQAL, the choice was to factor receivables. Even in the factoring market, EQAL faced problems because many factors like recurring receivables, which the company did not have. Fortunately, EQAL was able to find a factor that was comfortable enough with its business model. The cost of factoring for EQAL is a more than a bank loan, but less than venture capital, and has given the company access to cash flow.

DSO Interpretation

While the textbook discusses a cross sectional comparison of the components of the operating and and cash cycles, a recent article discusses a method to examine accounts receivable (AR) and days' sales outstanding (DSO) in a time series. For example, if AR is growing more quickly than DSO, the company could be offering credit terms that are too generous, or is attempting to book sales at the end of the quarter to make its performance look better. The examination of health care education company Healthstream in the article indicates neither of those. Two things we would like to point out in the article: The author points out that he likes to use end-of-quarter numbers rather than average receivables in his calculations. Remember, ratios can be calculated a number of different ways, and each has its own interpretation. So, if you are using ratios calculated by someone else, make sure you know how the ratio was calculated. Second, the author cautions that an investor should look into the root causes of the changes in ratios, which is always an important step any time you are examining financial ratios.

When Receivables Rise

One way that many companies have increased cash conversion cycles is to increase the accounts payable period. While this helps the company, it also means that the supplier now has a longer accounts receivable period. Large companies will often unilaterally inform small suppliers that they will increase the payables period. For small companies, the resulting increase in the receivables period can be devastating. During the recent recession, many small suppliers accepted the new terms forced on them because they were afraid of losing business. But many small suppliers are starting to fight back. For example, when one company was informed by a customer that they would be increasing the payables period from 30 days to 45 days, the supplier stated that their quote was based on 30 days, not 45 days. An increase in the payables period would have to result in a 10 percent price increase. The payables period went back to 30 days. Although many small suppliers feel trapped by large customers, there are often ways to reach a compromise that satisfies both parties.

The Check Is In The Mail

If you have looked at your billing statements, many companies are now asking you to sign up for auto billing, which allows them to withdraw the amount of your bill from your checking account, or automatic payment by credit card. The push for such payment plans reduces postage and processing costs for the companies, but as importantly, also means that the company gets the cash quicker. On the other side, companies like to pay as slowly as possible. Cox Communications has a unique way of accomplishing the delay in payments to customers. As a customer reports, Cox accepted a deposit to set up an account on a credit card. However, when the account was closed, Cox insisted on mailing a check. Although Cox denied that a delay was the reason for the paper check, this allows Cox time for processing and mailing, which keeps the money in Cox's cash account longer. And, since many people who cancel an account are moving, the mailing time is likely doubled.

Microsoft Wins Treasury Award

Microsoft has more than $1 billion in cash flowing through the company each day, so working capital management is a very important task. Recently, the company was awarded the Alexander Hamilton award by Treasury and Risk. Microsoft's working capital team worked on ways to improve cash forecasting. The team was able to reduce forecasting variances by 50 to 70 percent each month, resulting in a drop of over $200 million in the cash balances of subsidiaries.

GM Looks For A Revolver

GM is seeking a new revolver, or revolving credit line, for between $8 and $10 billion. The revolver will be used to replace an existing revolver of $5 billion, pay down other debt, and to provide liquidity. The commitments from individual banks will start at $600 million and go down to $350 million for the second tier. The upfront fees are 35 to 50bp (bp is a basis point, or 1/100th of a percent. One basis point is equal to .01%) depending on the amount committed by the bank. The interest rate on the loan is expected to be 250bp over LIBOR, and GM will pay 37.5bp on the unused amount of the revolvers.

Excess Euros

Apparently European companies could do a much better job of managing working capital. According to recent research, European companies could free up €886 billion ($1.09 trillion) in cash by improving working capital. The report found that the best performing companies collect 16 days faster, pay 16 days slower, and have about one-half of the working capital of a typical company. And very few companies appear to be stellar working capital managers. Of the 925 companies examined, only 99 improved working capital every year for three years and no company managed to improve the receivables period, inventory period, and payables period each year.

Negative Net Working Capital

Negative numbers are generally bad, however a recent survey of the communications sector in 2011 found that the best performing companies actually had negative working capital. While negative working capital can be dangerous, especially if liquidity gets tighter, the advantage is that you are actually using other companies' money for free. http://www3.cfo.com/article/2012/6/cash-flow_cash-flow-operating-working-capital-digitalglobe

King Cash

A basic tenet of Finance is that cash is king, especially in difficult economic environments. A recent survey sponsored by CFO shows how working capital management has changed in mid-sized companies since the recent recession began. A couple of interesting findings: Companies surveyed feel that their working capital positions have improved over the past three years (page 7), receivables and inventory management are key working capital priorities going forward (page 8), and larger firms are forcing smaller companies to accept longer receivables periods (pages 10 and 11). https://secure.cfo.com/research/index.cfm/displayresearch/14624750?action=download