While most observers view 2009 as the very heart of the Great Recession, it was also — in terms of working capital — the beginning of the Great Hangover. As 2008 drew to a close and the full extent of the financial crisis became clear, many companies scrambled for cash by pushing down hard on every available working capital lever at their disposal.
For them, it was payback time: inventories had to be replenished and overdue bills were finally paid in full. For other companies, those further down the supply chain or with longer cycle times, the full recession didn’t hit until late in the year, when unsold inventory swelled, customers lobbied suppliers for longer payment terms or discounts, and those suppliers asked their suppliers for leniency.
Either way the result was the same: 2009 was one of the worst years ever for corporate working capital performance, and certainly the worst that CFO has reported since it began keeping track of working capital trends more than a decade ago.
Average days working capital (DWC) for 1,000 of the largest U.S. public companies jumped by 8.2%, according to the CFO/REL Working Capital Scorecard. That rise, to 38.3 days in 2009 from 35.4 days in 2008, marks the biggest DWC deterioration in the last five years for that universe of large companies.
Among the elements that make up working capital, days sales outstanding (DSO) performance deteriorated by 10.4%, marking a glut in receivables that was balanced almost evenly by an 11.4% jump in days payable outstanding (DPO). And the combination of companies replenishing their inventories after 2008 and those still stuck with unsellable product in 2009 caused days inventory outstanding (DIO) to burgeon by 8.8%.
The question now is whether U.S. companies can turn that pain to gain. The latest figures essentially put companies back to 2006–2007 levels of performance, a period during which working capital gains stagnated after years of improvement. Made leaner and more efficient by the recession, companies should be able to wring more cash from working capital this year without relying on the still-thawing credit markets.
Yet during volatile economic times, companies often go for “low-hanging fruit” — simply delaying payments to suppliers, for example, or stopping production of slow-moving products. Those knee-jerk responses are a far cry from the “sustainable working capital program” advocated by REL president Mark Tennant. If an economic upturn takes hold, will companies be able to manage inventories, collections, and payments efficiently under all conditions, or will they struggle to refocus on these key processes?
Amid the wreckage there were some encouraging signs, and a number of companies performed well. “You have to keep in mind how fast the market was recovering at the end of the year,” says Stacy Smith, the CFO of Intel, referring specifically to the technology industry. Although the big chipmaker saw a 42% DSO deterioration for the entire year, “it wasn’t that there had been an aging of receivables back to us, it was just that there was a big increase in revenue that we hadn’t yet been paid for,” he says.