June 16, 2015

Corporate Debt Continues to Skyrocket As Companies do Little to Generate Cash By Optimizing Collections, Payables, and Inventory

  • REL's 2015 Working Capital Survey Finds Cash Flow Improvement Opportunity of More Than $1 Trillion
  • Top Performers Hold Half the Inventory, Collect from Customers Two Weeks Faster, and Pay Suppliers More Than Two Weeks Slower

MIAMI & LONDON, June 16, 2015 - In today's business world, the old adage "Cash is King" is being replaced by "Debt is King," according to the results of the 17th annual working capital survey from REL a division of The Hackett Group, Inc. (NASDAQ: HCKT), and CFO Magazine.

The study, which examines the working capital performance of nearly 1000 of the largest public companies in the U.S., found that companies continue to take on alarming amounts of debt. Debt rose by over 9 percent in 2014 to nearly $4.6 trillion, with companies leveraging low interest rates to fund increased investment activities. At the same time, companies once again made almost no improvement in working capital management, doing little to generate cash internally by optimizing how they collect from customers, pay suppliers, and manage inventory. A public excerpt of the survey results is available on a complimentary basis with registration at this link: www.thehackettgroup.com/solutions/working-capital-management/.

Companies that doubled their debt or more since 2007 saw their working capital performance worsen dramatically, REL's research found, while companies that decreased their debt over the same period saw a significant improvement.

Cash on hand decreased for the first time in a decade in 2014, largely due to expenditures on acquisitions, according to REL's research. But it has risen by 74 percent since 2007, and at $932 billion remains near its all-time high. Capex spending also continued its comeback, rising by 11 percent in one year.

For 2014, REL found that companies in the study could improve their cash flow by over $1 trillion, or 6 percent of the U.S. gross domestic product, by matching the performance of top companies in their industry. Inventory optimization represents the largest share of this opportunity. Top performers, who are seven times faster at converting cash into cash than typical companies, now hold less than half the inventory (22.2 days vs 50.7 days), while collecting from customers over two weeks faster (24.8 days vs 42.6 days) and paying suppliers 40 percent slower (55.4 days vs 39.5 days). CCC improved only marginally in 2014, shrinking by .7 days or 2 percent.

"U.S. companies are clearly enjoying all the benefits of the recent economic acceleration. However, their addiction to debt, and their apathy toward true cash flow management, is very disconcerting. Today, money is cheap. But there's no question that interest rates will rise, possibly sooner rather than later. And when that happens, companies focused on optimizing their CCC will be best positioned to mitigate their risk, continue to fund investment, and outperform their peers," said REL Associate Principal Analisa DeHaro.

For the first time this year, REL shifted from its historic calculation of Days Working Capital (DWC) to measure how effective companies are at receivables, payables, and inventory, to using Cash Conversion Cycle (CCC) as its preferred metric. CCC more accurately quantifies the time each dollar is tied up in the buying, production, and sales process before it is converted to cash through collection from customers. CCC has improved by only 3.9 percent (1 day) since 2007.

While some companies are focused on improving working capital performance, even those find it challenging to sustain improvements. Only 10 percent of the companies in the REL survey improved working capital performance for three years running, and only 2 percent improved it for five years running. Five companies showed remarkable results, improving working capital for seven years in a row: AmerisourceBergen, Diebold, EQT, Goodyear, and Masco.

Several industries, including technology hardware and biotechnology, appeared to go against the trend, significantly improving working capital performance in 2014. Industries that showed the largest decline in working capital performance in 2014 included diversified consumer goods, automobiles, and construction and engineering.

The REL/CFO Working Capital Survey is the only one of its type that publishes comprehensive performance information on working capital and a comprehensive array of underlying metrics for 967 of the largest companies in the U.S. A similar annual study from REL looks at performance of the largest public companies in Europe.

The complete data and analysis package for this survey is available for purchase from REL. More information is available via email at info@relconsultancy.com

About REL

REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a world-leading consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. REL's tailored working capital management solutions balance client trade-offs between working capital, operating costs, service performance and risk. REL's expertise has helped clients free up billions of dollars in cash, creating the financial freedom to fund acquisitions, product development, debt reduction and share buy-back programs. In-depth process expertise, analytical rigor, and collaborative client relationships enable REL to deliver an exceptional return on investment in a short timeframe. REL has delivered work in over 60 countries for Fortune 500 and global Fortune 500 companies.

More information on REL is available: by phone at (770) 225-3600; by e-mail at info@relconsultancy.com; or on the Web at www.relconsultancy.com.

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