2023 Working Capital Survey

In this episode of the Business Excelleration^® Podcast, a discussion of the key findings of the new Working Capital Survey, which examines the payables, receivables, and inventory performance of the largest U.S. companies in 2022, and the upcoming challenges companies will face in 2023. Overall, working capital performance degraded significantly at typical companies due to worsening payables performance. With The Hackett Group Director István Bodó and Director James Ancius.

Welcome to The Hackett Group’s Business Excelleration Podcast, where – week after week – we hear from experts on how to avoid obstacles, manage detours, and celebrate milestones on the journey to world-class performance. This episode is hosted by Gary Baker, Group Global Communications Director at The Hackett Group. In today’s episode, Gary talks with Director, István Bodó, and Director, James Ancius, about key findings from our new U.S. working capital study, how companies performed, what can come next in 2023 and what companies should be doing right now to improve their working capital performance. The Hackett Group has been publishing an annual working capital survey for over 20 years by looking at cost and cash performance of the top 1,000 largest publicly listed non-financial companies in the U.S. based on their financial statements.

To begin, James starts off by discussing main takeaways in this year’s study. He says in 2021, there was a historic triple crown in all three working capitals. In 2022, there was course correction due to inflation pressures, supply chain disruptions with shut downs and geopolitical instability from the Russia vs. Ukraine war. The CCC, a major composite of working capital performance, deteriorated by 3% and the DPO deteriorated by 8%. They also assess the magnitude of the movements and record movements between -2% to 2%. They saw 3%, 5% and 8% for DSO, DIO and DPO, which is unusual. The gap between median and top companies has widened with an increase in excess working capital. The top 1,000 companies have 12% up in working capital and median company performance has significantly decreased. DPO is led by consumer variables, recreational products and oil & gas. The most notable improvement came from oil & gas, money and wholesale distribution centers.

On the industry side, James states that motor vehicles had their second straight year of CCC deterioration. Motor companies have switched to more environmentally friendly cars, which are more expensive to produce. Prices of vehicles have increased, there are less cars available and a decline in new vehicle sales. The second industry he pointed out was the semiconductor industry. Their DIO was the highest point in the past 10 years, but decreased last year due to high volatile demand, new product introductions and supply chain disruptions. There has been significant inventory correction and elevated inventory levels. The last industry mentioned is wholesale distributors. They had massive revenue growth this past year that contributed to consumer spending and per capita earnings. They improved collections and optimized inventory. The DPO declined as food price, inflations and pressure on suppliers and wholesale contributors increased.

Next, István discusses how the best working class performance has improved, increasing the gap between best in class and medium companies. There are many differences between these two types of companies. The first is that best in class companies increased their revenue three times above medium companies. Their AP balance increased while the medium companies decreased. Best in class companies made efforts to build strong relationships with suppliers by synchronizing their purchases and engineering plans and with flexible management. In textile companies, we saw significant revenue growth. The best in class companies invested in technology and information system upgrades, while the medium just started the process in technology transformation putting them behind the curve. The improvement for DIO for best in class is 39%.

To improve working capital metrics, István states that companies need to improve their accounts receivable by reviewing credit risk management processes and inflation should be at the forefront of negotiations. There also needs to be reviews of credit and collection management and changing payment behaviors. In inventory, supply chain processes need to be reviewed with communication and risk assessments on cash, and cost and service communications. There needs to be agility and visibility to fix problems across supply chains. For payable, the supply assurance is the priority. This makes the difference between “just in time” and “just in case.” There also needs to be a retraining of the workforce and for medium companies, he suggests that they don’t fall further behind by improving capabilities and remaining competitive. Looking ahead, István expects market uncertainty that will threaten supply chains and higher risk on contingency planning. Companies will increase the use of subscription models and even though customers have adopted online purchases, shipping costs will increase. He also prompts companies to revisit review strategies. Finally, they summarize the working capital survey by saying 2021 was a reset and 2022 was a course correction.

Timestamps:

• 0:41 – Welcome to this episode, hosted by Gary Baker.
• 1:49 – Main takeaways in this year’s study.
• 5:19 – Industry performance side.
• 7:57 – Differences between best in class and medium companies.
• 10:50 – What companies can do to improve these working capital metrics.
• 14:03 – Challenges and expectations for working capital looking ahead.