Hackett: Working capital large firms is decreasing

The 1,000 largest companies in the United States have more than $850 billion in cash on hand. In comparison, smaller companies in the market place remain starved for capital as they have difficulty borrowing money from financial institutions. Despite the improvement in cash on hand the overall working capital position of the largest firms deteriorated. This can be concluded from the research by REL Consulting, a division of The Hackett Group.

The research was held among the 1,000 largest companies in the United States.

Cash in hand increases as revenue rises

REL's research shows that as revenues have increased over the past year, so has cash on hand, with companies now holding 11 percent more cash than they did in Q2 of 2010. Total debt also increased by 7 percent during the period, indicating that companies are taking advantage of low-cost borrowing opportunities to increase their cash on hand. REL's research also found that companies are beginning to incrementally increase the amount of cash they are putting to use for purposes such as paying dividends, making capital expenditures, and share buy-backs.

Working capital worsening

At the same time, the consultants conclude that working capital performance for 1,000 of the largest public companies degraded slightly. These companies now have nearly $800 billion unnecessarily tied up in receivables, payables, and inventory due to sub-optimized working capital management. Although performance in account payables improved slightly, companies are holding nearly 2.5 percent more in inventory.

"Cash hoarding continues to be the trend. But high cash balances don't necessarily indicate strong performance," said REL Associate Principal Dan Ginsberg. "The working capital numbers clearly show that while companies managed to right-size their working capital in late 2009, in response to economic challenges, they quickly lost focus once revenue growth returned, and the improvements they made were not sustainable. Companies are now taking their eyes off the ball when it comes to efficiently running their business. Accounts receivables are bloated, and companies are holding more inventory than required".