Hackett Working Capital Survey: All cash conversion cycle elements degraded last year

With all the ways in which the CFO role is expanding, one thing remains certain: the efficient management of working capital is pivotal to the survival and growth of the business.

Continued inflation, high costs of capital, challenges around talent, and the impact of AI on finance operations mark today's CFO's biggest challenges. But day-to-day tasks still revolve around making sure the organization remains in a healthy cash flow position.

Complete 2023 data from The Hackett Group's Working Capital Survey, provided exclusively here by CFO.com, indicates all elements of the cash conversion cycle (CCC), and therefore the overall productivity of working capital management, declined in 2023. Although day sales outstanding (DSO) saw the highest jump since the pandemic, both DSO and days inventory outstanding (DIO) degraded for the first time in a decade.

Additionally, according to the report, revenue was nearly flat in 2023, with only a 0.3% increase, after averaging a 10% YoY increase over the past decade. Yet even with this drop in revenue growth, Hackett identified that there is a $1.76 trillion working capital opportunity that is an untapped source of additional liquidity. It is incumbent on CFOs to work across the company to optimize this opportunity on their balance sheets.

Cash conversion cycle changes

Despite the overall degradation, other parts of the CCC saw marginal change. The overall change in CCC was +1.3 days, a 4% year-over-year increase. DIO remained essentially flat with a marginal degradation of 0.01 days, and days payable outstanding (DPO) experienced a decline of 0.1 days. However, when broken down by industry, some industries, many of whom have factors outside of their control, had sharp increases in DSO degradation.

Marine shipping (+24%), biotechnology (+20%), oil and gas (+15%), and food and staples retail (+13%) all led the pack in DSO degradation. As surveyors noted in the report, these industries are heavily reliant on B2B transactions, which could indicate a leverage shift toward buyers. They're also heavily supply chain-reliant and have specific needs that drive their cash flow, surveyors told CFO.com.

"We've definitely seen a continuation of what I call the leverage shifts between buyers and sellers," said Shawn Townsend, director at The Hackett Group. "[And] that's driving the DSO and DPO degradation and [also] the DIO integration, and again, it's fairly marginal. It's really the continuation of inflation and supply chain issues [and] the market dynamics driving overall inventory that is making it much harder for companies to manage inventory."

DIO degradation impacted telecommunications equipment (+23%), utilities (+23%), air freight and couriers (+22%), information technology services (+19%), and railroads and trucking (+18%) the most, alongside notable decreases in DPO in industries like biotechnology (-18%), motor vehicles (-15%), semiconductors and equipment (-13%), media broadcasting/movies/entertainment/TV (-12%), and telecommunications (-11%).

Consumer-facing service providers see healthy revenue increases

The top 1,000 U.S. publicly traded companies' revenues remained nearly flat this year, contrasting with the typical 15%-20% increases seen by surveyors in the post-pandemic period. Excluding 2020 and the pandemic, revenue growth has usually averaged between 4% and 5% regardless of industry.

Although overall revenue was stagnant at 0%, the industries that did see increases were largely consumer-facing - an area where Hackett researchers say many companies are shifting portions of their business model to offset some of their risks and adjust to developing consumer preferences.

"One thing we're seeing this year in particular is that some of the technology companies aren't just manufacturers, but they have a lot of software and are expanding their product mix so that it's service-based in an effort to offset other risks," said James Ancius, director at The Hackett Group.

"Experiences and services were some of the better performing industries in terms of working capital and revenue, including hotels, recreation activities, and cruise lines," Ancius continued. "We've seen a shift in consumer preferences, and companies are adjusting to offset risk that comes with traditional or physical products. That also helps with inventory because if you've got a service, there's no inventory to it."

Supply chain finance use may be higher than data shows

For the first time in the report's history, The Hackett Group analyzed supply chain finance (SCF) usage and the data around it. The number of companies participating in supplier finance programs continues to increase year-over-year. However, due to the recent FASB requirements for SCF disclosure, the 2021 figures likely understate the true extent of use of this type of financing tool.

The total spend settled through SCF programs decreased, but despite the overall drop in revenue and cost of goods sold (COGS), SCF adoption as a percentage of available spend increased by 6% year-over-year, showing a growing appeal to these types of products despite the rising costs of capital and new regulations around them.

"Since the FASB directive for companies to disclose all their supply chain finance programs, not all of them have really worked through their 10-K," said Townsend. "So, most of those numbers are probably understated. Regardless, we saw that there's still a lot of companies using supply chain finance, as the spend volume settled through the SCF program as a percentage of the overall spend has increased."

Notable operational and liquidity changes

Again, supply chain management has a lot to do with not only the function of CCC but operational metrics as well. Following a 1% improvement in 2022, inventory as a percentage of revenue decreased by an additional 0.2%, reaching 9%, the lowest level since 2020.

This improvement may indicate that companies have effectively managed ongoing supply chain constraints and avoided inventory buildup - many of these lessons learned during the pandemic. Significant reductions were observed in the textiles, apparel, and footwear (-21%); internet and catalog retail (-13%); and food and staples retail (-11%) industries.

Although the EBITDA margin fell by 4% from the previous year, it is still slightly above the 10-year average of 18%. After reaching a record high of 19.3% in 2021, the continued decline over the past three years highlights the effects of economic uncertainty, high interest rates, and inflationary pressure on profitability. Cash on hand has also returned to pre-pandemic levels, averaging 9% of revenue.

Update: Shawn Townsend provided greater clarification regarding his comments on supply chain finance.