Working Capital and the Pandemic – Survey Results and Strategic Recommendations

Covid has left its mark on working capital performance. The Hackett Group Principal Bryan Hall interviews Senior Director Gerhard Urbasch on the results from our latest working capital survey, breaking down performance for receivables, payables, and inventory, and offering strategies companies can use to make improvements in each area.

Show Notes

Today’s episode of Business Excelleration Podcast is hosted by Bryan Hall, The Hackett Group’s Principal and Finance Transformation Leader. He is joined today by Gerhard Urbasch, a Senior Director at The Hackett Group, to discuss the implications of the COVID-19 pandemic in relation to The Hackett Group’s annual working capital survey.

As the episode begins, Gerhard briefly summarizes the U.S. working capital survey results. The survey shows significant deteriorations in all key financial figures within the 849 largest U.S. based companies outside the financial services sector. Revenue fell by an average of 14%, net income by 61%, gross margins by 1.5% and earnings before interest and taxes fell by 23%. Declining revenues amidst the pandemic were persistent across the study, with just a few industries seeing increased revenue. These industries include construction materials, internet and catalog retail, air freight and carriers, and home building.

Next, Gerhard reveals the cash balances and debt during the same time period. While revenues decreased by 14%, debt increased by 13%, and cash on hand increased by 47%. These numbers imply that companies were borrowing more than usual to ensure they had adequate cash in the midst of uncertainty. Many of the observed revolver drawdowns are now being converted to longer term debts. Bryan asks whether or not these short term borrowings are sustainable. Gerhard says this is dependent on a few factors, including whether the debt is short term or long term, how healthy the business is, and what happens with inflation. He then gives a brief explanation of the cash conversion cycle and reveals how and why it was affected. Many companies faced major supply chain disruptions towards the beginning of the pandemic, which is why alternative sources of supply are so important to consider.

To conclude the episode, Bryan asks Gerhard to share the trends he foresees for the future. Gerhard opts to be hopeful and predicts a V-shaped recovery with revenues increasing faster than the balance of accounts receivable, inventory and accounts payable. Additional improvements in DSO and DIO are likely, and DPO should deteriorate. He then offers advice for decision makers to allow themselves more leeway in the future.

Timestamps:

0:58 – Introduction of podcast and hosts.

1:38 – Gehard summarizes The Hackett Group’s survey results.

2:22 – The industries that saw increased revenue amidst the pandemic.

3:12 – Cash balances and debt amidst the pandemic.

4:24 – Is short term borrowing sustainable?

5:35 – The performance of working capital.

6:05 – Explanation of the cash conversion cycle, how it was affected, and why.

9:25 – Gerhard provides a background for the supply chain disruptions.

10:08 – Bryan asks for alternatives to borrowing companies could consider.

13:27 – Foreseen trends for the future.

14:30 – Advice for decision makers moving forward.