01/10/2022 | Press release | Archived content
Dive Insight
Many companies have gained significant financial ground since early in the pandemic, as the reopening of the economy helped drive up revenue by 14% over the period with 38 out of the 48 industries surveyed seeing revenue growth of over 25%, the study found. Meanwhile, the cash conversion cycle, which measures the speed by which companies are able to convert investments in inventory and other assets into cash flow, fell to 29.9 days from 33.4 over the period.
But the improvements are fragile and uneven across industries. Top-performing sectors like lumber, steel, oil and construction benefited as price increases drove growth while airlines and hotels benefited from resumption of leisure travel but revenue declined for motor vehicle and auto parts hit by supply chain issues and internet retail saw so-called reopening declines as some consumers shifted back to shopping in stores as the economy began to recover from the pandemic.
This past year many of the gains were passive rather than active measures taken by financial teams to shore up liquidity and working capital, Bailey said. One exception was the focus on accounts receivable, which by necessity had to be examined and re-engineered as it went remote, forcing executives to analyze their systems. In the past many adjustments were made on the backend in an effort to get late payments in but more recently there's been a shift in focus on credit and risk management processes by which companies examine customers' ability to pay based on the pandemic up front, Bailey said.
Another company financial metric which saw a dramatic rise in the third quarter was inventories, which jumped 11%. The rise comes as the long-term move toward just-in-time inventory processes was upended by the pandemic. Companies seeking to secure goods amid shortages and shipping problems faced challenges from rising material costs, product availability and changing consumer demand.
The tough road that many financial executives have experienced in inventory over the pandemic is now pushing a new conversation around inventory management, Bailey said. Until recently, "the product range was always expanding and new products being added were making supply chains more complex," he said. "The pandemic offered some opportunities to rethink what we do. We may see companies move more toward this model in which not everything would be available everywhere."
Inventory is one of the more challenging working capital issues because different parts of a single company do not share the same views of it, he said. For example, CFOs see the opportunity for releasing liquidity but need to work with sales teams that would want to have more products available. But Bailey said he expects it to be a central focus of financial executives this year. CFOs will asses whether inventories should be located closer to the company, how many products are needed and consider whether there's an opportunity to rationalize inventory. The companies surveyed have about $517 billion in excess inventory that could be unlocked, he said.
"Many organizations say in 2022 'inventory is really our priority,' but not yet," Bailey said. "Companies are looking at focusing on optimizing inventory levels but waiting for supply to restabilize and to make sure there are no more false starts."