US Companies Continue to Play Year-End Games With Receivables, Payables, and Inventory
- Manipulation Netted $52 Billion Balance Sheet Bump For Over 450 U.S. Companies In Q4, But Companies Quickly Lost These Artificial Gains and More
MIAMI & LONDON, October 23, 2012 - Many large U.S. companies continue to try and "game the system" at year-end, artificially improving their balance sheets by manipulating receivables, payables, and inventory, according to a new study from REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT). Their efforts, which can range from deep discounting and extended payment terms on sales to simply "losing" supplier bills, do have a positive impact in Q4, the study found. But these companies pay a harsh price in Q1, when working capital performance bounces back to even worse levels than before.
According to REL's research, which examined the working capital management performance of 979 of the largest publicly-traded companies in the U.S., nearly half of all companies in the study showed evidence of year-end gamesmanship. These companies improved working capital performance by 10 percent in Q4 2011, adding $52 billion to their balance sheets, or an average of $111 million per company. But in Q1 of 2012, these same companies saw working capital rebound dramatically, worsening by 11 percent, or $53 billion, an average of over $113 million per company.
REL's research found that companies which play year-end games with working capital can get quite creative in their cash flow management approaches. To boost receivables, they often increase incentives for sales staff and extend payment terms to get customers to buy more. At the same time they strong-arm other customers into paying early. On the payables side, they take a wide range of actions that put tremendous strain on their supplier relationships. In many cases, they suddenly start finding discrepancies in supplier invoices, or other excuses to delay payment. Some simply tell suppliers 'the check's in the mail,' even if it isn't, or delay receipt of goods they have already ordered. To reduce inventory, these companies sometimes take the dramatic step of shipping orders early, regardless of when the customer has asked for them. In addition to all this, these same companies often keep their factories running at full capacity whether they need to or not, so they can claim higher operational efficiency and effectiveness.
REL has been tracking the practice of year-end gamesmanship since 2005. Significant evidence of year-end gamesmanship was found in each year's working capital results, with the exception of 2008 and 2009. In these two years companies were struggling with the impact of the recession and many were left with significant excess inventory and uncollected receivables at year-end. REL experts had hoped to see evidence that during the recession companies had put procedures in place to eliminate year-end gamesmanship. But that does not appear to have happened. Instead, in 2010 and 2011 companies went back to the same practices they had pre-recession.
"Rather than develop a strategy to drive sustainable working capital improvements, these companies play the same games each year, trying to pretty up their balance sheets to impress analysts and investors," said REL Principal Michael Rellihan. "But like a rubber band stretched too far, they snap right back, and by the end of Q1 these companies are worse off than when they started. Their bad business practices may make them look good in the short-term, but they have a negative impact on the long-term bottom line."
REL's research also offered recommendations for how companies can avoid the trap of year-end gamesmanship and instead focus on sustainable working capital improvements. REL recommended that senior leadership make it clear that short-term practices designed to improve working capital performance will no longer be tolerated, and use an audit committee to monitor and track performance. Working capital management should be made a continuous process. Compensation structures should be realigned so that sales staff are rewarded based on the profitability of their sales, and not just the revenue they generate. Finally, rolling targets should be used for working capital metrics, to discourage short-term thinking and encourage sustainable improvements.
Readers can download the research, with free registration, at this link: www.relconsultancy.com/research/2012/earnings-game/
About REL
REL, a division of The Hackett Group, Inc. (NASDAQ: HCKT), is a world-leading consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. REL's tailored solutions balance client trade-offs between working capital, operating costs, service performance and risk. REL's expertise has helped clients free up billions of dollars in cash, creating the financial freedom to fund acquisitions, product development, debt reduction and share buy-back programs. In-depth process expertise, analytical rigor and collaborative client relationships enable REL to deliver an exceptional return on investment in a short timeframe. REL has delivered work in over 60 countries for Fortune 500 and global Fortune 500 companies.
More information on REL is available: by phone at (770) 225-7300; by e-mail at info@relconsultancy.com ; or on the Web at www.relconsultancy.com.
About The Hackett Group, Inc.
The Hackett Group (NASDAQ: HCKT ), a global strategic business advisory and operations improvement consulting firm, is a leader in best practice advisory, business benchmarking, and transformation consulting services including strategy and operations, working capital management, and globalization advice. Utilizing best practices and implementation insights from more than 7,500 benchmarking studies, executives use The Hackett Group's empirically-based approach to quickly define and implement initiatives that enable world-class performance. Through its REL group, The Hackett Group offers working capital solutions focused on delivering significant cash flow improvements. Through its Archstone Consulting group, The Hackett Group offers Strategy & Operations consulting services in the Consumer and Industrial Products, Pharmaceutical, Manufacturing, and Financial Services industry sectors. Through its Hackett Technology Solutions group, The Hackett Group offers business application consulting services that help maximize returns on IT investments. The Hackett Group has completed benchmark studies with over 2,800 major corporations and government agencies, including 97% of the Dow Jones Industrials, 86% of the Fortune 100, 90% of the DAX 30 and 48% of the FTSE 100.
More information on The Hackett Group is available: by phone at (770) 225-7300; by e-mail at info@thehackettgroup.com .
