U.S. companies optimizing working capital through digital transformation, Hackett finds

Companies surveyed by The Hackett Group reduced their working capital as a percentage of revenue by 2% in recent years, according to the Hackett 1000 on cost and cash optimization. Although the survey was published prior to the outbreak of the coronavirus pandemic, the findings are beneficial to companies looking to make the most of their working capital.

Fueled by faster receivables payments and inventory optimizations, businesses are trying harder to optimize working capital after several years of pushing suppliers to extend payment terms. The survey found inventory levels fell by 2.8%, the first decrease in six years. In total, working capital of the Hackett 1000 is equal to 6.2% of U.S. GDP.

“Overall, we’ve seen a real focus on payables improvement over the past few years, as that’s generally been seen as the easiest way to improve working capital. Companies pushed suppliers to extend payment terms and offered supply chain financing,” said Craig Bailey, Associate Principal for Strategy & Business Transformation at The Hackett Group, in a press release.

“But this shifted in 2018, with days payable outstanding (DPO) declining slightly, meaning that companies were paying suppliers a bit more quickly. It appears that companies may have pushed suppliers about as far as they can in this area and are now shifting their focus to the more challenging tasks of optimizing receivables and inventory.”

Optimizing the data

The Hackett survey is compiled using publicly available financial statements from the 1,000 largest non-financial companies with headquarters in the U.S. The survey ranks and measures companies using working capital metrics of days sales outstanding (DSO), days inventory outstanding (DIO), days payable outstanding, and cash conversion cycle (CCC).

Debt grew by 5% in 2018 to reach 47% of revenue, even as cash declined by 9%. Driven in part by continued low interest rates, The Hackett Group warned that the growing gap between debt and cash created significant risks for many businesses in the event of an economic downturn. Relatively low interest rates have also driven strong M&A activity for several years, creating challenges and opportunities for working capital optimization.

“Low interest rates in recent years have also driven high volume of M&A activity,” Bailey said. “Few companies focus on working capital as part of M&A, and the result is often a complicated disparate of processes for payables, receivables and inventory. To address this, companies can focus on process standardization, improved governance, as well as smart automation.

“As a starting point, it’s also critical for companies to assess recurring drivers of excess working capital, define optimal performance levels and reinforce cash awareness across the organization. It’s also critical to bring functions together to balance cash objectives with cost and service, and develop the ability to segment and analyze customers and suppliers, so they can focus and customize their efforts to best optimize working capital performance.”

Digital transformations

Digital transformation captures many of these optimizations, and processes like payments and receivables are ripe for further automation. Transaction standardization, segmentation and analysis of customers and/or suppliers, as well as automated PO distribution and supplier data uploads are just a few of the enhancements The Hackett Group has seen being implemented in recent years.

The survey also examined SG&A expenses for the first time in 2018, identifying wide differences in spending between industries. Mature industries like oil and gas or airlines spend as little as under 4.5% of annual revenue on SG&A, while many technology-focused industries, including healthcare and life sciences, carry SG&A bills between 30%-50%.

On average companies in the Hackett 1000 spent 3.8% of annual revenues on general and administrative functions, including finance, procurement, IT and HR — a decrease from 4.5% in 2011. Top performers spent just 2.8% of annual revenues on G&A expenses, and earned equivalent revenue from 30% fewer employees. The optimization leaders who pursued the greatest degree of digital transformation indicate that the average business stands to lower its G&A expenses by as much as 44% through full implementation.

“It is easy, relatively speaking, to take cost out of operations,” Hackett Principal for Benchmarking Anthony Snowball said in the release. “The harder task is keeping that cost out over time. But the bottom-line opportunity is significant, and digital technologies are a significant accelerator.

“To sustain cost improvement, companies must pursue continuous innovation rather than one-time initiatives, and strive to increase efficiency and effectiveness while also improving the customer experience. The journey to realize this opportunity involves multiple paths, including smart automation tools such as robotic process automation, cognitive computing capabilities and technology optimization.”