(Bloomberg) -- With rates expected to stay high for a while, corporate finance chiefs have a strong incentive to skip debt markets and free up more of their companies’ cash instead. And it turns out, they have plenty of it.

The biggest US-based companies can wring a combined $1.76 trillion from their operations by taking steps to tighten up how they manage key areas such as inventory and payments, according to preliminary research from consulting firm Hackett Group Inc.

Hackett’s analysis focuses on a metric known as working capital performance, which gauges how efficiently a company runs its day-to-day business. The firm found that last year, working capital performance deteriorated at the top 1,000 US companies by revenue, leaving more money tied up in operations that could have been unlocked for other purposes. 

By Hackett’s estimate, more than 11% of the revenue generated at these firms was trapped in operations.

The results “are very alarming to see,” said Shawn Townsend, a director at Hackett. “High inflation and interest rates are forcing up borrowing costs, which is making efficient use of available cash even more important.”

Companies’ working-capital demands depend on a slew of factors, including how many days’ or months’ worth of inventory they hold, whether they pay suppliers after 30, 60 or 90 days, and when they receive payments from customers. 

Drilling into the details, Hackett found that so-called days sales outstanding, which measures the average time it takes for a company to get paid by its customers, went up by 1.2 days to 40.1 days in 2023. During the same period, days payables outstanding, the average time it takes for a corporation to pay its bills, declined 0.1% to 57.6 days, indicating businesses paid their suppliers a little more quickly than in 2022. 

Hackett also tracked the so-called cash conversion cycle, which measures how long it takes a company to convert cash spent on inventory back into cash from sales. This gauge rose by 3.6% to 37.7 days, a sign of deterioration. Inventory remained largely unchanged, with companies holding 55.2 days of stock. 

Low-Hanging Fruit

There are steps companies can take to improve efficiencies. Advisory firms recommend going after low-hanging fruit first, such as not paying suppliers before getting paid themselves. From there, companies can work toward managing inventory more closely, negotiating more favorable payment terms with suppliers or establishing a supply-chain finance program.

“Try to control things within your own walls first,” said Anthony Jackson, working-capital services leader at Deloitte & Touche LLP. “Does your sales team give terms that are consistent with your policy? Are they getting all the information needed to collect receivables? How you set up processes in the beginning makes a big difference.”

At DuPont de Nemours Inc., Chief Financial Officer Lori Koch is working through excess inventory that the company accumulated in 2022. “We have been focused on optimizing both inbound supply and outbound finished goods,” Koch said, adding DuPont believes it is past the bottom of the destocking cycle. “The higher interest-rate regime certainly pressures inventory carrying costs and makes inventory management perhaps even more important than usual.” 

Zoetis Inc., the maker of medicines for pets and livestock, reported higher inventory in the first quarter. “New products are putting some upward pressure on inventory and working capital,” CFO Wetteny Joseph said. The company is trying to better anticipate demand and turning to payment terms with suppliers, he said.

‘Project Red’

Some businesses are setting up specific committees to tackle the issue, said Joseph Neu, founder of NeuGroup, a treasury advisory firm. “More and more companies are doing that,” he said, pointing to conversations with finance executives. 

Generac Holdings Inc., a Waukesha, Wisconsin-based maker of power systems, created such a group. “During the pandemic, we just hoarded inventory to keep the business going,” said York Ragen, the company’s CFO. At its peak, Generac had 120 days of inventory, roughly a month more than before, totaling $1.4 billion.

With an initiative called “Project Red” – consisting of finance, supply-chain and commercial staff – the company is working to reduce inventory to 90 days by the end of 2024. “The more cash we can squeeze out of the business, the more we can spend on buybacks,” Ragen said, adding that the company also plans to invest in capital expenditures, debt reduction and potential dealmaking.

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