Have we reached peak DPO? Largest US companies hit ceiling on delaying supplier payments

According to new working capital research from The Hackett Group, the largest US companies found it harder to extend payments to suppliers in 2022. The research also suggests that these companies have hit a ceiling on the practice of delaying supplier payments to bolster balance sheets.

Data collected and analysed from the US’ largest 1,000 public companies showed that the number of days companies take to pay suppliers, or days payable outstanding (DPO), decreased by five days or 8% on 2021 levels. 

Overall working capital performance, or cash conversion cycle (CCC), also worsened by 3% in 2022. Contributing factors include inflationary pressure on costs, supply chain disruptions and increased geopolitical instability. 

On the other hand, receivables, or day sales outstanding (DSO), improved by 5% due to significant improvements in customer durables, recreational products, airlines and oil and gas driven by continued economic rebound post-pandemic. 

Inventory levels, or day inventory outstanding (DIO), also improved by 3% due to strong demand, the use of technology to optimise inventory management and strategic improvements implemented due to the pandemic. Hackett’s research suggests, however, that these are eclipsed by the significant degradation in payables.   

The companies surveyed now have nearly $1.9 trillion in excess working capital, including $666 billion in excess inventory, $665 billion in payables, and $531 billion in receivables. Top performers now collect from customers 42% (19 days) faster, hold 59% (41 days) less inventory, and take 52% (25 days) longer to pay suppliers.

The research found the strongest working capital improvements in the air travel, hospitality recreation, oil and gas and wholesale distribution industries. The weakest working capital performance was found in the motor vehicle, semiconductors and equipment, computer hardware and peripherals, and household and personal care industries. 

Revenue growth increased by 15% in 2022 – a slowdown on 2021 levels but still far exceeding the 4% to 5% pre-pandemic average. Unusually, earnings before interest, taxes, depreciation and amortisation (EBITDA) declined by 3% in 2022 due to pressures on raw materials and labour.

Cash on hand as a percentage of revenue also dropped by 19%, nearly returning to pre-pandemic levels, as companies used cash hoarded during the pandemic to improve operational performance and pay off debt.

Shawn Townsend, Director at The Hackett Group said “After the ‘great working capital reset’ of 2021, this is a year of course correction and growth, despite significant challenges in the business environment. As we predicted in mid-2022, it appears that companies have reached an inflection point in their ability to improve their balance sheet by extending payments to suppliers. 

“For a decade or more, this practice has been the easiest way for companies to improve their working capital performance, and companies have heavily relied on it. But now, supply assurance is a bigger challenge than ever for most companies, with many facing issues related to supplier criticality, competition for resources and the availability of supply.

“We expect this trend of worsening payables performance to continue in 2023, especially as the restructuring of several major regional banks will likely lead to less availability of supply chain finance assets.

“In addition, the new accounting disclosure rules introduced by the Financial Accounting Standards Board (FASB) requiring companies to disclose information about their supply chain finance programs has softened the demand for such tools.”

Hackett Group Director István Bodó added “It’s interesting to note that the working capital performance gap between typical companies and top performers continues to widen, driven by the degradation of the median performers rather than the improvement of the top performers as seen in previous years. The ratio of top-to-median performance usually traded at an average of ~2.95 in the last few years has now widened by 10% to reach 3.30.

“With higher interest rates, persistent inflation, continued market unpredictability and many of the other major challenges companies are facing, companies must focus on optimising working capital if they are to remain competitive long term,” said Bodó. “Cash flow management should be a top priority on the corporate agenda to provide liquidity for strategic investments.”

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