Corporates Must Tread Lightly With Delayed Supplier Payment Tactic

The Hackett Group released its annual Working Capital Performance of Top U.S. Companies report last week, signaling strength in U.S. corporates’ working capital performance. According to analysts, last year, the largest 1,000 non-financial enterprises in the U.S. showed their strongest performance in working capital management since 2008.

However, the strategy behind that improvement reveals a darker reality about the state of business in the U.S.

According to Hackett, the main reason why working capital performance improved among large corporates is because they lengthened their supplier payment terms significantly. Researchers warned that inventory management and accounts receivable performance actually both deteriorated in 2017, and lengthening payment terms “masked” those poor performance markers.

Corporates in the U.S. took an average of 3.4 days longer than they did in 2016 to pay their suppliers. Days payable outstanding (DPO) reached an average of 56.7 days for those 1,000 top corporates, Hackett found. Meanwhile, days sales outstanding (DSO) increased by 4.4 percent, reaching 39.5 days, while days’ inventory on hand also increased, though only slightly, by 0.6 percent to 51 days on average.

Hackett analysts found that top performers are widening the gap between typical firms when it comes to cash management: Those top performers are now three-times faster than the average corporate at converting working capital into cash. Those top performers also collect from customers 2.7 weeks faster. Top performers, however, are also strengthening their positions by delaying supplier payments. This group pays suppliers three weeks slower, averaging 66.9 days, the report found.

“This translates into a $1.1 trillion improvement opportunity for companies that are not top performers, an amount equal to nearly 6 percent of the U.S. Gross Domestic Product,” the report stated, adding that the gap between top performers and the average firm is still growing.

Researchers noted that non-top-performers could improve their cash positions by a collective $358 billion by paying suppliers later.

“The primary strategy many companies are using to improve working capital performance is simply to hold back payments to suppliers, in some cases extending payment terms up to 120 days,” said The Hackett Group Associate Principal Craig Bailey in a statement. “Payables are often the easiest starting point for working capital improvement, as the processes are largely in finance’s area of control, and it has less risk of impacting on customers.”

However, Bailey warned, the knock-on impacts of delayed supplier payments are stark, with delayed invoice payments pushing up DSO for their vendors.

“This year, it is driving DSO to a 10-year high,” he said. “It can even destabilize a supply base, if companies are not careful.”

While corporates have increased their use of supply chain financing, Bailey said this strategy still means corporates rely on delaying invoice payments, and is not the best way to boost working capital performance. Continued delayed payments and lengthening DPO are increasing pressure on smaller companies that are less agile in improving their payables performance, he explained.

According to Shawn Townsend, director of Strategy & Operations at The Hackett Group, there are better strategies than delaying supplier payments to improve working capital performance. That includes targeting critical versus non-critical suppliers, streamlining their procure-to-pay cycles, digitizing their procurement and supplier payment processes with robotic process automation (RPA), and even exploring blockchain. Unfortunately, Bailey said, it appears corporates are avoiding these strategies, which are more difficult to implement than delaying invoice payments.

The government’s continued increase of federal interest rates has driven firms to take a close look at their working capital performance, Bailey explained, while record levels of M&A are also forcing financial executives to improve cash positions.

“So, we’re seeing a significant improvement in working capital performance,” he stated. “But debt is also reaching record levels and, despite the improvements, it appears clear that most companies are still looking for quick fixes, and avoiding doing the process improvement and other hard work required, to truly improve working capital.”