Craig Bailey, associate principal for strategy and business transformation with The Hackett Group, Inc., details how the COVID-19 pandemic affected working capital, inventory levels, corporate debt and payments to suppliers during 2020.
The pandemic wrought “significant” changes to working-capital performance in 2020, according to The Hackett Group’s survey of the 1,000 largest non-financial companies. Underlying factors include declining revenue and cost of goods sold in many industries. At the same time, in the continuation of a trend that predates the pandemic, buyers dramatically slowed payments to suppliers. The cash conversion cycle deteriorated by 2%, driven by increased inventories and receivables. “Companies were holding cash, borrowing at record levels, and debt and cash on hand were up,” says Bailey.
Longer payment terms jeopardized suppliers’ access to the capital needed to keep production flowing. Before 2020, Bailey says, buyers might have sought structured payment terms extensions. But with the advent of the pandemic, they simply withheld payments and unilaterally pushed extensions out to suppliers. (Some organizations took the opposite tack, he notes, shortening terms to help suppliers out during the crisis.)
The first half of 2021 saw no indication of a reversal of those trends. “That didn’t surprise us, hearing so much uncertainty about when things will get back to normal, and what future demand patterns and the supply landscape will look like,” Bailey says.
A surge of consumer demand in certain industries, coupled with shortages of key materials, has placed an unusual amount of pressure on buyers to get product to market, and that dynamic has served to shift the balance of power in favor of suppliers, at least temporarily. Meanwhile, corporate debt and cash on hand remain high, as businesses gird themselves for an uncertain future, and “rough times ahead,” Bailey says.
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