Multinational companies' cash conversion cycle continues toshrink, driven by improvements in days payables outstanding (DPO),according to this year's “U.S. Working Capital Survey” by The HackettGroup. The study examined the 2017 annual reports from the 1,000largest non-financial companies that have headquarters in theUnited States. The cash conversion cycle for these organizations iscurrently 33.8 days, a 4 percent improvement over 2016.

The largest companies have achieved even better results forworking capital: Among the 20 biggest companies in the study byannual revenue, the median cash conversion cycle is just five days.(And because these companies have the largest portfolios ofpayables, inventory, and receivables, their outstanding workingcapital results skew the overall results; The Hackett Group'scalculation of the cash conversion cycle across all 1,000 companiesis considerably tighter than the same statistic for the mediancompany in the study.)

“If we remove the oil-and-gas sector, the cash conversion cyclehas been shrinking, so improving, for six years now,” says CraigBailey, associate principal at The Hackett Group. “Organizations continue to extend the payment terms on theirpayables.” From 2016 to 2017, DPO lengthened from 53.5 days to 56.7days.

Not surprisingly, the lengthening of payment terms has alsoimpacted days sales outstanding (DSO), although to a smallerdegree. For companies in the study, DSO deteriorated from 37.8 daysto 39.5 days. “There are three likely reasons why DSO isn'tincreasing at the same rate as DPO,” Bailey says. “It could be thatthe large organizations in our study are having success pushing outterms to smaller suppliers that aren't represented in the data set.Organizations could be leveraging supply chain finance; we knowthat's becoming a more popular option. And third, theseorganizations might be improving their collections processes.They're no longer focused on challenging the payment termsextensions their buyers are requesting; instead, they're focusingmore on how to minimize the impact of the new terms and make surepayments are made on time.”

Days inventory on hand (DIO) stayed basically flat in 2017,increasing less than 1 percent from 50.7 days to 51 days. “We had alarge increase in DIO a couple of years ago, driven by the shippingproblems in 2014,” Bailey says. “Since then, we haven't seen manyorganizations feeling the need to drive those buffers out of theirsupply chain. That's not unexpected—DIO can often be the hardestmetric to change because reducing inventories requires buy-in fromcompeting internal stakeholders across your differentfunctions.”

Moving forward, Bailey expects organizations that are doing wellon DPO to turn their attention to reducing inventories, and forcompanies that haven't optimized payments to focus on catching upin extending their DPO. “For a long time, in many sectors, workingcapital wasn't a high priority because of low interest rates,” hesays. “We are now seeing a clear trend toward organizationsfocusing on working capital. They're going after DPO first. Thenthose organizations that have achieved world-class performance onthe DPO are starting to move into DIO.

“What's going to be very interesting,” Bailey adds, “is to seehow things play out in 2018—so in our 2019 report. We are hearingfrom more and more organizations that are starting to feel theimpacts of tariffs. Not only is inventory becoming more expensivefor them, but some organizations have been strategically purchasedin advance of tariffs coming in. We expect to see some inflated DIOin next year's report, and to see organizations trying to offsetthat increase by playing with the working capital levers as theyattempt to further improve DPO and DSO.”

There's room for very significant improvement. In fact, TheHackett Group's study found that the 1,000 organizations itevaluated had the opportunity to improve working capital by a totalof $1.13 trillion. The report's authors quantified this opportunityby dividing the companies into quartiles in terms of performance oneach of the three core metrics: DPO, DSO, and DIO. Then, for everyorganization outside the top quartile, they calculated the amountof cash the organization would generate if its payables,receivables, or inventory improved to top-quartile performance. Thestudy identified $443 billion in inventory opportunity, $334billion receivables opportunity, and $358 billion payablesopportunity. (See Figure 1, below.)

Shawn Townsend, director at The Hackett Group, says: “Workingcapital is really about process improvement, especially in theback-office functions that handle payables and receivables. We'restarting to see a lot of companies adopting robotic processautomation, or RPA. Companies are looking at how they can optimizetheir working capital processes, and in some cases they're evenbringing outsourced processes back in-house with an RPA elementthat optimizes both their cost structure and their cash structure.We expect that trend to affect the cash conversion cycle in thefuture.”