Report: Companies conserved cash, increased debt during pandemic

The pandemic drove big changes in working capital performance among the 1,000 largest non-financial U.S. companies in 2020, according to research from The Hackett Group, Inc. The firm’s Working Capital Survey and Scorecard revealed a tumultuous financial year for many companies.

Drops in revenue and cost of goods sold in many industries affected overall working capital performance, according to the survey. The data also show that companies dramatically slowed payments to suppliers last year, and that disrupted demand and unsold products drove inventory to higher levels. In addition, companies increased their cash on hand by 40% to protect themselves from the impact of the pandemic, and they continued to accrue debt at record levels, with debt rising by 10% year-over-year, according to the survey. Capital expenditures also fell to record low levels, as companies cut spending and conserved cash in anticipation of further market uncertainty.

The survey examined four key working capital metrics—Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), Days Payables Outstanding (DPO) and Cash Conversion Cycle (CCC). The biggest working capital shift was in DPO, which rose by 7.6% last year. The survey found that typical companies now take more than 62 days to pay suppliers, an all-time high according to the research. Sales and inventory metrics also rose to all-time highs, with DSO increasing by 3.8% to 41.5 days and DIO rising by 7.1% to 54.4 days. CCC, a standard measure of working capital performance, deteriorated by 2%, driven by increases in inventories and receivables, according to the survey.

“Liquidity was of crucial importance as companies responded to the pandemic, driving companies to conserve cash and [increase] debt, to put themselves in a better position to extend terms to customers, support suppliers, and weather unforeseen changes in market conditions,” Craig Bailey, associate principal, strategy and business transformation for The Hackett Group, said in a statement. “On payables, we saw many companies simply forced their suppliers to take 30-day term extensions. But some were able to support weaker suppliers to protect their supply chain. On the inventory side, companies in many industries saw dramatic revenue drops, and responded by consolidating their offerings or otherwise simplifying their mix of products.”

The research also identified a working capital improvement opportunity of more than $1.2 trillion among the companies surveyed. Upper quartile companies now convert cash more than three times faster than typical companies (15.7 days versus 46.4 days), according to the research. Top performers collect from customers 41% faster (29 days versus 48.8 days), hold less than half the inventory, (29.4 days versus 62.5 days), and pay suppliers 56% slower (76.7 days versus 49.3 days). The largest year-over-year shift was in payables, where the performance gap between top quartile and median companies increased by 10 percentage points in 2020, the research showed.

The Hackett Group Working Capital Survey and Scorecard calculates working capital performance based on the latest publicly available annual financial statements of the 1,000 largest non-financial companies with headquarters in the United States, sourced from FactSet/FactSet Fundamentals.