Hackett-REL Research Alert: Top U.S. Companies See $72 Billion in Improved Working Capital; Yet Annual Survey Identifies an Additional $450 Billion in Potential Cash

The top 1,000 U.S. companies liberated $72 billion of cash fromworking capital in 2005 by enhancing the way they collect bills fromcustomers, pay suppliers, and manage inventory, according to resultsfrom the 9th Annual Working Capital Survey conducted by Hackett-REL,the Total Working Capital practice of The Hackett Group, anAnswerthink company (NASDAQ: ANSR).

Significant opportunity still remains to increase cash flowthrough the optimization of working capital. U.S. companies still have$450 billion unnecessarily locked up in working capital, based on thegap between typical companies and top-quartile total working capitalperformers in the Hackett-REL analysis.

The Hackett-REL survey, which was unveiled today in the Septemberissue of CFO Magazine, found that the 1,000 largest U.S. companiesreduced total working capital by 5.6% in 2005. Improvement accelerateddramatically year-over-year, with companies generating 55% greaterlevels of working capital reduction than in 2004.

A complementary study covering Europe, which is being published inthe September issue of CFO Europe, reveals that the top 1,000companies in Europe fell behind their U.S. counterparts in 2005,generating virtually no gains and seeing total working capitalperformance improve by only 0.5%, less than a quarter of the reductionthey saw in 2004 (see separate Research Alert for more details). TheEuropean companies had been playing catch-up with the U.S. for severalyears, and in 2004 generated working capital results virtually on parwith U.S. companies.

Excluding the automotive sector, which can sometimes skew resultsbecause of the large financing arms of the major manufacturers, thetop U.S. companies showed a 4.0% reduction in total working capital in2005 (up from 2.5% in 2004), while the top 1,000 European companiessaw a reduction of only 0.6%, (down from 3.3% in 2004).

"More than ever before, U.S. companies are seeing the value ofimproving their total working capital performance," explainedHackett-REL President Stephen Payne. "Executives understand that thisis an exceptional way to free up cash that can enhance shareholderreturns or be dedicated to funding strategic initiatives such as newproduct development, penetrating emerging markets, paying down debt,or repurchasing shares. But even with the strides companies have madein the past few years, there's still a tremendous amount of moneybeing left on the table here, especially with 43 industry sectorsshowing improvement while 35 worsened in 2005. These companies stillhave far to go.

"Several trends played a role in helping U.S. companies generatethe results they did in 2005," said Mr. Payne. "It appears that morecompanies are adding a cash flow performance element to theirexecutive compensation plans, so there are now stronger incentives forbusiness leaders to focus in this area. The greatest improvement thisyear was in Days Sales Outstanding, in part because accountsreceivable is the area of working capital where CFOs have the mostinfluence. Reducing inventory levels, for example, is more of achallenge, as it requires the participation of many other parts of thecompany and is typically wrapped in far more complex businessprocesses. Finally, many companies are increasing their use ofoffshore manufacturing, which extends the supply chain and can drivehigher inventory levels."

Analyzing the poor European performance, Hackett-REL EuropePresident Andrew Ashby explained that with corporate liquidity beingmuch improved, management attention seems to have shifted away fromworking capital towards growing the business and the bottom line."Over the past few years, European companies have picked thelow-hanging fruit in working capital, generating improvements byextending payment terms to suppliers and being more aggressive incollections. But now, with the economy on the rebound, companies seemto have shifted their focus towards growth, and taken their eye offthe ball of improving working capital management," said Ashby. "It isinteresting that U.S.-based companies are finding a better balancebetween achieving growth while still driving operational improvementsthat result in lower levels of working capital - balancing gains instrength between the P&L and the balance sheet, therefore growingwhile delivering exponential levels of free cash flow versus theEuropean companies."

Hackett-REL found that the top 1,000 U.S. companies achieved DaysWorking Capital (a measure of total working capital) of 50.4 days.Improvements came in all three areas that make up total workingcapital, with the greatest progress seen in receivables, as expressedby Days Sales Outstanding, which dropped by 3.9%. Days InventoryOutstanding saw a 2.9% reduction, and Days Payables Outstandingincreased by 0.6%. Note: In Days Payable Outstanding, an increaserepresents improved performance, as companies can decrease theirworking capital by paying suppliers on more favorable terms.

Of the 82 industry groups examined by Hackett-REL, 12 managed topost a double-digit improvement in working capital. Most improvedsectors included cable broadcasters (46% reduction), oil (45%reduction), marine transportation (30% reduction), coal (19%reduction), and toys (19% reduction). The CFO article also featuresprofiles of three companies and their successful DWC reductionefforts: Brightpoint Inc., a $2.1 billion distributor of mobile phonesand other wireless products; Nucor Corp., a $12.7 billion steelcompany; and wireless communications company Qualcomm.

Highlights of The Hackett-REL survey, are featured in theSeptember issue of CFO magazine, available online atwww.cfo.com/workingcap. More detailed information on this Hackett-RELresearch is available to members of Hackett's Total Working CapitalExecutive Advisory Program. More information is also available on TheHackett Group's Web site, at www.thehackettgroup.com/research/twc/.

About Hackett-REL

Hackett-REL, the Total Working Capital practice of The HackettGroup, is the global leader in generating cash flow improvements fromworking capital and operations. For more than 30 years, Hackett-REL'sexpertise has helped clients in over 60 countries liberate billions ofdollars in working capital ($25 billion in the last ten years alone),creating the financial freedom to fund their strategic objectivesincluding acquisitions, new product development, debt reduction andshare buy-back programs. The Hackett Group is an Answerthink company,whose clients include 97% of the Dow Jones Industrials, 77% of theFortune 100 and 90% of the Dow Jones Global Index.