Growing Problems: The 2007 Working Capital Survey

Focused on growth and more reliant on overseas suppliers, companies have let inventories swell.

Read the complete results of the 2007 working capital survey, or review just those results that appeared in print.

Maybe it’s globalization. As U.S. companies source more goods from the far corners of the world, it makes sense that they would stock more inventory as a guard against potential breakdowns in their supply chains. Or maybe it’s economic priorities. With corporate coffers bulging like overloaded transpacific freighters, finance executives could be taking their eye off second-tier metrics like inventory, payables, and receivables. Whatever the explanation, 2006 marked the first time in five years that the 1,000 largest publicly traded companies in the United States (excluding automakers) failed to decrease the amount of cash they had tied up in working capital relative to sales. In fact, by year-end 2006, working-capital days were actually up a smidgen: 38.8 days versus 38.7 at year-end 2005.

Blame inventories, says REL, the research and consulting firm that compiles the data for this annual scorecard. According to its figures, the nation’s biggest firms allowed their days inventory outstanding (DIO) to rise to 31.2 last year, up 2.1 percent from 2005. That performance overshadowed slight improvements on the payables and receivables fronts, the other two key components of working capital. Days sales outstanding (DSO, a measure of how efficiently companies convert receivables to cash) shrank to 39.5 from 39.9, an improvement of 1.2 percent, while days payables outstanding (DPO, a measure of how long companies hold onto their own cash before paying vendors) rose to 31.9 from 31.8, an improvement of 0.3 percent.

The paltry gains in DSO and DPO suggest that many CFOs are worrying less about working capital these days and more about taking advantage of a strong economy to drive sales. “We’re in a very high growth stage right now,” concedes a senior finance executive at one specialty retailer, who asked to remain anonymous. “Squeezing that last dime out of the payables account isn’t the biggest focus of our attention at the moment.”

That’s understandable, perhaps, but also unfortunate. As cash-flow connoisseurs seldom tire of pointing out, money tied up in working capital is money that’s not available to invest in the business, fund an acquisition, pay a dividend, or finance a stock-buyback program. And according to REL, the opportunity foregone by companies that haven’t whittled down their working capital to best-practice levels is enormous: $764 billion excluding automakers, $877 billion if you include them. That’s the amount of cash that would be freed up if companies in the bottom three quartiles of working-capital performance simply brought themselves in line with first-quartile performers.

Inside the Rise in Inventories

To be fair, finance executives and supply-chain managers were fighting at least three head winds last year as they sought to keep inventory levels to an optimal minimum. First, sales were growing in 2006 but not at the same pace as they were in 2005; the gain was up 10.6 percent in 2006 versus 14 percent the year before. As the growth rate slowed, says REL president Stephen Payne, some companies may not have been able to pare their inventories fast enough to keep pace.


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