This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

US Companies Continue To Play Year-End Games With Receivables, Payables, And Inventory

Stocks in this article: HCKT

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.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,765.37 -12.78 -0.07%
S&P 500 2,062.80 +1.57 0.08%
NASDAQ 4,750.9320 +2.5360 0.05%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs