2012 CFO magazine REL Consulting Working Capital Survey

2012 CFO magazine REL Consulting Working Capital Survey: "It’s one of the most important metrics for gauging a company’s efficiency and financial health. So when a new survey of 1,000 of the largest public companies in the United States indicates that their working capital continues to be much larger than is considered prudent, that’s cause for concern.

The annual survey, conducted by REL Consulting, reveals an overall lack of sustained working capital improvement among U.S. companies. After a predictable decrease in working capital during the Great Recession, when companies focused more on the balance sheet, working capital performance has leveled off."

Days working capital (DWC) — the number of days it takes to convert working capital into revenue — did decrease marginally in 2011, from 37.7 days to 37 days. But REL downplays the improvement, attributing it in part to the companies’ 13% average revenue growth. “To have a 1.9% decrease is a positive, but not by a lot,” says Prathima Iddamsetty, senior manager of operations, research, and marketing at REL, a working capital consultancy.

Cash on hand across the group of surveyed companies, dubbed the REL U.S. 1,000, increased by $60.3 billion in 2011, helped in part by companies taking advantage of low interest rates to issue more debt, up by a record $233 billion year-over-year. Those companies now have a staggering $910 billion in excess working capital, including $425 billion in inventory, according to REL. “Way too much cash is being left on the table and not being put toward growth objectives,” says Iddamsetty.

There is a wide gulf between top-performing companies in the upper quartile of the survey and median performers. On average, top performers have 49% less working capital tied up in operations, collect from customers more than two weeks faster, pay suppliers about 10 days slower, and hold less than half the inventory than median companies. (The 2012 CFO/REL Working Capital Scorecard shows the best and worst companies in terms of working capital performance in 20 industries.)

The research indicates little sustainability in working capital improvement. Fewer than 8% of companies managed to reduce days working capital over the past three years, and no company surveyed improved all elements of DWC — inventory, receivables, and payables — over the period.

CFOs should care about these results, not just because working capital is a reliable index of efficiency, but because the world is getting more competitive. “When global investors think about where to put their money, they look for where they’re going to get the best return for a given amount of risk,” says Kevin Kaiser, professor of management practice at INSEAD, the international business school. “Having capital tied up is an inefficient use of their investments. In a world where people have choices about where to send their cash, they’re not going to invest it in companies with inefficient working capital practices.”

'via Blog this'