EuroFinance

The efforts of treasurers at US industrial giants to leverage automation and process improvement strategies reaped working capital benefits in 2021, according to analysis of filings. The companies collected payments from customers 9% faster than a year ago as measured by Days Sales Outstanding (DSO), the average number of days that it takes to convert trade receivables into cash.

The importance of receivables management in working capital is highlighted by supply chain bottlenecks which executives expect to persist in 2022, leading to higher inventory and fast-track payments to suppliers.

Compounding Efforts

Consider General Electric (GE), the multinational industrial conglomerate which took 78.4 days to receive payments from its customers in 2021, 7% or 6 days faster than last year

GE’s treasury team extensively uses automation, digital solutions and process improvement practices to create more contemporary treasury capabilities and processes that drive efficiency and better visibility across key activities, including cash management, exposure management, internal funding, and global trade finance, a spokesperson for GE told EuroFinance.

By implementing automation along with process improvement strategies, treasurers are able to streamline the accounts receivable process to create a clear workflow by identifying steps that can be optimized and automated.

Consequently, by eradicating the time wasted on manual tasks, treasurers have accelerated the billings process which has further resulted in faster collections.

At the start of 2020, almost half of GE’s billings used to occur in the final months of the quarter and now these strategies have reduced the average billing cycle time by 30% in 2021, resulting in faster collections thereby helping the company to unlock funds trapped in receivables, which stood at $15.6 billion at the end of 2021, $1.07 billion or 6.5% lower than the previous year.

“Receivables were a source of cash, driven by DSO improvement across all segments. Our turns are using lean and automation to better manage contract deliverables, bill customers more accurately, faster and generate cash quicker” the spokesperson added.

The strategic shift to focus on operational rigor using technology was driven by GE’s announcement to discontinue its receivables factoring program in Q2 2021 under which the current receivables of GE’s industrial division, now split into aviation, healthcare and energy, were sold to GE capital in order to receive cash in advance at an interest cost. This resulted in a $5.1 billion hit to its free cash flow in 2021.

“Without the factoring dynamics, better operational management of receivables have become a true cross-functional effort.” said Carolina Dybeck Happe, CFO at GE.

However, with its proactive approach to optimizing work capital, the company has been able to recoup $2 billion in 2021 and estimates another $3 billion in positive flows from working capital in 2022.

Both Days Inventory Outstanding (DIO) and Days Payable Outstanding (DPO) increased by 3 days to 106 and 110 days in 2021, respectively while Cash Conversion Cycle (CCC) was flat at 75 days during the same time period. GE continues to use a supply chain finance facility which helps to lengthen its payment terms with suppliers, with $3.4 billion of payables financed in this way at the end of 2021.

North Carolina-based Honeywell International also followed suit as its DSO stood at 71.5 days in 2021, 9.5% lower than 79 days in 2020.

The company has focalized on ‘Honeywell digital’, one of the three main transformation initiatives which resulted in a $1 billion of cumulative sales, productivity, and working capital benefits since 2018.

“This increase was driven by lower working capital, including strong collections and world-class payables, offset by higher inventory as we continue to work through the constrained supply chain environment and extended lead times.” said Darius Adamczyk, CEO at Honeywell during Q4 earnings call.

The tailwinds from faster receivables turnover has helped the company to reduce its cash conversion cycle by four days to 54 days in 2021 while it faced pressure from operating with higher levels of inventory and faster payment cycle to suppliers as both DIO and DSO deteriorated by 2 days to 74 days and 91 days during the same time period.

The industrial consumer goods manufacturer, 3M took 47.7 days to collect payments from customers, fastest in the last six years, further pushing its CCC to 84 days in 2021 as compared to 93 days a year earlier.

“Working capital continues to remain a big priority for us, doing data and data analytics; and if you do cash conversion cycle in Q4 of 2020 versus Q4 of 2021, you're going to see that the velocity of working capital went up” said Monish Patolawala, CFO at 3M during a January 25th earnings call.

Zurich based industrial company ABB also reduced its DSO by 6% or 5 days to 83 days in 2021 while its cash conversion also took 83 days, fastest since the onset of the pandemic.

“Our working capital to revenue ratio was 8.1%, so I haven't seen it that low and then if you look at the components, we actually got about $100 million in receivables, and our overdues are pretty much the lowest.” said Timo Ihamuotila CFO at ABB

The construction machinery and equipment company, Caterpillar saw its receivables cycle shorten by 16% or 11 days to 56 days in 2021 while its CCC which had increased to a record 134 days in 2020 has subsequently reduced to 116 days during the same time period.

Amongst other industrial companies, Raytheon technologies, Emerson Electric and Rockwell Automation reported an 8.5% fall in DSO to 53, 52 and 71 days, respectively leading to a reduction in their cash conversion cycle during the year.

On the contrary, for the Dutch conglomerate Philips, DSO reduced by 4 days to 81 days in 2021, but working capital benefits from converting faster receivables were insufficient to counter the burden from a record DIO of 116 days and a shorter payment cycle of 74 days as CCC increased to 123 days in 2021, highest in the last four years.

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