Triple Threat: All Working Capital Metrics Degrade for the First Time in a Decade
Potential
After a year of growth despite inflationary and recessionary risks, the largest
This presents a concerning trend for businesses because macroeconomic uncertainties and inflationary pressures are expected to persist, imposing additional external constraints on working capital. This effect is compounded by persistently higher interest rates, significantly increasing the carrying cost of money trapped in working capital compared to previous years. As a result, redoubling efforts on working capital optimization is more urgent than ever before to navigate the increasingly volatile market conditions effectively.
Equally alarming is the softening of aggregate revenue figures. Over the past decade, excluding the pandemic year, revenue has averaged a 10% year-over-year increase. However, this year has seen a stark contrast, with revenue growth remaining essentially flat at just a 0.3% increase. This trend illustrates the complex dynamic between efforts to manage inflation and the risk of economic stagnation due to high interest rates.
The widening gap between best-in-class and median companies continued to expand, driven primarily by the significant improvements of top performers rather than the degradation of median ones. Historically, the ratio of top-to-median performance has averaged around 2.95-to-1, but this year it has increased by 8% to reach a record 3.2-to-1.
“This widening gap underscores the imperative for businesses to diligently manage their financial resources to remain competitive. As the disparity grows, so does the opportunity for competitive advantage,” said
One of the most notable changes is the substantial degradation in DSO, which increased by 3% this year to reach 40.1 days, marking the first time since the pandemic began that DSO has shown degradation. It’s essential to note, however, that the gains from the previous two years more than offset this year’s degradation, resulting in DSO performance comparable to the pre-pandemic average of around 40 days. Additionally, industries with a heavy business-to-business focus lead the pack in DSO degradation, potentially signaling a leverage shift to buyers within these sectors, emphasizing the evolving dynamics of supplier-customer relationships in response to changing market conditions.
DIO saw a slight rise of 0.01 days, marking its first degradation since the pandemic. Despite this marginal increase, DIO remains significantly improved from the pandemic peak of nearly 58 days. Industries with the most significant downturn in inventory performance were those heavily dependent on energy in their cost of goods sold, reflecting potential advance buying to hedge against geopolitical uncertainties.
DPO declined by 0.1 days this year, continuing a trend of deterioration seen since the pandemic, with an overall 7% decline, particularly for industries relying on high-tech equipment – like computer chips – where the leverage is still with the suppliers given the supply constraints in that sector.
Additionally, The Hackett Group’s research identified
“Gen AI will provide new enablement opportunities that will enhance working capital management across the board,” said
The increased carrying cost of money trapped in working capital, driven by high interest rates, underscores the necessity for companies to intensify their efforts to optimize working capital and effectively navigate volatile market conditions.
The Hackett Group’s 2024
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