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Study: Treasurers Load Up On Debt, Neglect Working Capital

  • By Nilly Essaides
  • Published: 6/23/2015

Companies continue to accumulate cheap debt at the cost of working capital—a short-term tactic that might hurt long-term financial strategy. That’s the takeaway from the 17th annual working capital survey, a new study by REL, a division of the Hackett Group. “Corporate debt continues to skyrocket as companies do little to generate cash by optimizing collections, payables and inventory,” the report states.

The working capital survey found companies face a cash flow improvement opportunity of more than $1 trillion, while top performers hold half the inventory, collect from customers two weeks faster than their peers, and pay suppliers more than two weeks slower than their peers.

The study examined the working capital performance of nearly 1000 of the largest public companies in the U.S. and found that debt rose by over 9 percent in 2014 to nearly $4.6 trillion, with companies leveraging low interest rates to fund increased investment activities. Meanwhile, companies made little to no improvement in working capital management, thus doing little to generate cash internally.

According to the survey, companies that doubled their debt or more since 2007 saw their working capital performance worsen dramatically, whereas companies that decreased their debt over the same period saw a significant improvement.

Top working capital performers are

  • Seven times faster at converting funds into cash than average companies
  • Hold less than half the inventory (22.2 days vs. 50.7 days)
  • Collect from customers over two weeks faster (24.8 days vs. 42.6 days), and
  • Pay suppliers 40 percent slower (55.4 days vs. 39.5 days).

“U.S. companies are clearly enjoying all the benefits of the recent economic acceleration. However, their addiction to debt, and their apathy toward true cash flow management, is very disconcerting,” said REL Associate Principal Analisa DeHaro. “Today, money is cheap. But there’s no question that interest rates will rise, possibly sooner rather than later. And when that happens, companies focused on optimizing their CCC (cash conversion cycle) will be best positioned to mitigate their risk, continue to fund investment, and outperform their peers.”

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