Q2 Working Capital Update

The Hackett Group Director Shawn Townsend and Director István Bodó discuss the Q2 2022 refresh of The Hackett Group’s working capital survey, looking at how companies performed in terms of payables, receivables, and inventory over the first half of 2022.

Show Notes

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. Today’s episode will discuss the 2022 Q2 refresh of The Hackett Group’s Working Capital Survey. His guests are Director Shawn Townsend and Director István Bodó from The Hackett Group’s Working Capital team.

The Hackett Group has been publishing a working capital survey for over 20 years. The research looks at the cost and cash performance of 1,000 of the largest publicly listed nonfinancial companies with headquarters in the U.S. Companies are ranked across four key dimensions of working capital performance: days sales outstanding (DSO), days inventory outstanding (DIO), days payables outstanding (DPO) and cash conversion cycle.

To begin, Shawn gives listeners an overview of the findings of the 2022 survey. In terms of working capital performance, 2021 was a year unlike any other. It marked the first time since 2010 the four components of working capital were all exhibiting positive trends. The movement, which surprised him the most, was the improvement of inventory performance, with a 2% improvement. The DSO also improved by 2% after a consecutive yearly deterioration of 2%. Finally, DPO continues the improvement trend marginally. Then, we hear some main takeaways from the Q2 2022 data compared to Q2 2021 data. DIO and DSO have been historically flat, but the degradation in DPO performance is surprising after witnessing its slowdown. Shawn suspects this trend will continue in the foreseeable future. This may be due to geopolitical conditions favorable toward sellers and the observation that companies are reaching the limit of payment-term extension. He explains that we are beginning to see the leverage shifting from the buyers to sellers in this environment. The real aim, then, is about supply chain support and injecting liquidity into the supply base. When it comes to DPO, Shawn explains, the industries which have degraded the most include wholesale distributors and airline industries. These industries share in the common type of supplies they need and the scarcity of these supplies in this environment.

Next, István shares the areas of DIO and DSO, which have observed degradation. Airlines, for example, improved DSO by 32%. Hotels, restaurants and recreation continued to improve by 10%. These business-to-consumer companies tend to have shorter customer payment terms and, as revenue increases, it is reflected into the DSO numbers. Looking at DIO, we see that it has been flat as well. Many companies are still struggling to find their way post-pandemic and have found it difficult to improve inventory performance. Listen as he highlights the changes in liquidity and operational performance. Despite inflation, cost increased by only 1% from 2021 to 2022. This reveals that companies are managing costs and consumer demand quite well. We also see that cash on hand has decreased by almost 30%, indicating that companies continue to use the cash they have hoarded in the past to pay off their debts in response to increased interest rates.

To companies looking to optimize working capital and cash flow today, Shawn would first tell them that supply chain constraints and the lingering impacts of COVID-19 are already clouding business. Managing working capital effectively can mean the difference in companies who struggle to survive and companies who thrive. Inventory and supply chain management is the biggest challenge facing organizations now. Too much overstock of the wrong inventory can become obsolete and result in added business costs. He recommends not taking your foot off the gas when it comes to working capital management to enable further agility among continuing change. István adds that traditional credit and collection management processes should be reviewed to ensure agility in changing payment behaviors. Also, payment terms and contracts may need to be reviewed and receivables management brought to the forefront. Similarly, contingency planning will become increasingly important in procurement and supply planning. Going forward, he recommends incorporating risk to the cash, cost and service supply chain planning trade.

As the episode wraps up, Shawn sums up his best advice for managing inventory visibility better. This can be done by aligning supply chain practices with demand, identifying operational exposure and risks, establishing inventory levels that factor in potential disruptions, and providing insights into manufacturing supply and visibility to demand volatility and forecasting.

Timestamps:

• 0:56 – Welcome to this episode hosted by Gary Baker.
• 2:01 – An overview of the findings of the 2022 survey.
• 3:35 – Main takeaways of the Q2 data.
• 7:07 – The main industries of degradation in DPO.
• 8:05 – István discusses the main areas of degradation in DIO and DSO.
• 10:00 – Changes in liquidity and operational performance.
• 11:52 – Shawn and István offer advice for organizations.
• 16:14 – The need for reviewing end-to-end supply chain processes.