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.