And housekeeping at one company often affects working-capital components at another. Joan Channell, director of accounting services for Toledo, Ohio-based Owens-Illinois Inc., which makes plastic and glass packaging, notes that some of its brewery customers shut down their plants at year-end, because the short holiday weeks in December are a good time to schedule filling-line maintenance. “That schedule, in turn, affects the numbers for Owens-Illinois’s beer-bottle business,” says Channell, because it reduces sales while collections from earlier periods continue. “If the payment terms with that customer are relatively short, we can have a low AR balance [on December 31]. This is a significant goodie that happens at year-end for us.”
Nowhere is the impact of year-end goodies more pronounced than among companies dependent on holiday sales. In 2002, the toy industry, for example, showed a sales-adjusted 42 percent decrease in inventory—a major influence on working capital—during the make-or-break Christmas season.
In fact, when the retail clothing, household appliance, and toy industries are excluded from our survey analysis, the average percent decrease or increase in net working capital is cut in half.
Steve Payne, REL’s chief executive officer, argues that U.S. companies still tend to leave far too much for year-end housecleaning. Even excluding seasonal businesses, a strong pattern of last-quarter improvements and first-quarter deteriorations is still evident. Better continuous management of payables, receivables, and inventory, he argues, would go a long way toward minimizing the financial equivalent of giant dust bunnies under the bed. Indeed, he says, REL is often approached by potential clients looking to improve working capital in order to boost fiscal year-end results. “It’s pure short-termism,” he says, and the numbers suggest that it’s a corporate habit that varies only by degree.
Particularly remarkable is how symmetrical the swing is from one fiscal year to the next (see our chart on “The 10-K Sway“). From their third to fourth quarter of 2000, companies in 20 industries examined by REL reduced their net working capital by an average of 6.7 percent, then wiped out those gains with a 7.9 percent increase in the first quarter of 2001. A 4.8 percent reduction at the end of 2001 was offset by a 6.6 percent first-quarter 2002 increase. Net working capital dropped by 4.8 percent again at the end of 2002, only to tick up 5.2 percent in the first quarter of last year. (As this article went to press, most companies were still releasing their 2003 year-end results.) In specific industries, the numbers were sometimes much higher—as high as 50 percent in some cases.
Cheryl Beebe, vice president of finance and corporate treasurer at Corn Products International Inc., based in Westchester, Illinois, says she hopes such year-end games are decreasing. “With the changes in corporate governance, and the scrutiny put on companies with regards to the quality of their financial reporting,” she says, “my perception is that there will be less and less of this year-end push.”