Pandemic caused significant changes in working capital performance in 2020
Companies dramatically slowed payments to suppliers, while disrupted demand and unsold products drove inventory to higher levels
The pandemic drove significant changes in working capital performance among the 1,000 largest non-financial U.S. companies in 2020, according to new research from The Hackett Group. The survey found that drops in revenue and cost of goods sold were seen in many industries, and this was a major factor affecting overall working capital performance.
In addition, companies increased their cash on hand by 40% to protect themselves from the impact of the pandemic, and continued to accrue debt at record levels, with debt rising by 10% year-over-year. Capital expenditures also fell to record low levels, as companies cut spending and conserved cash in anticipation of further market uncertainty.
Days Payable Outstanding (DPO) was the main working capital shift evident in 2020, rising by 7.6%, with typical companies now taking more than 62 days to pay suppliers, an all-time high. Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO) also rose to all-time highs. DSO increasing by 3.8% to 41.5 days, and DIO rose by 7.1% to 54.4 days.
The report also identified a working capital improvement opportunity of more than $1.2 trillion among the companies surveyed. Top performers collect from customers 41% faster (29.0 days versus 48.8 days), hold less than half the inventory, (29.4 days versus 62.5 days) and pay suppliers 56% slower (76.7 days versus 49.3 days).
The survey also found that cash on hand increased by 40% year-over-year, the first significant increase in a decade, as companies sought to safeguard against continued uncertainty, and in some cases prepare for potential opportunities. Debt continued its long-term upward climb, driven by low interest rates and available credit, increasing 10% year-over-year. Debt has risen by 67% since 2015. The pandemic also drove companies in many industries to cut capital expenditures, with Capex declining by 10%.
“Liquidity was of crucial importance as companies responded to the pandemic, driving companies to conserve cash and increasing debt, to put themselves in a better position to extend terms to customers, support suppliers, and weather unforeseen changes in market conditions,” said Craig Bailey, Associate Principal, Strategy & Business Transformation, The Hackett Group. “On payables, we saw many companies simply forced their suppliers to take 30-day term extensions. But some were able to support weaker suppliers to protect their supply chain. On the inventory side, companies in many industries saw dramatic revenue drops, and responded by consolidating their offerings or otherwise simplifying their mix of products.”