US Companies Continue to Play Year-End Games With Receivables, Payables, and Inventory
October 23 2012 - 8:30AM
Business Wire
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:
http://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 working capital management 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.
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