Rising Rates Boost Companies’ Focus on Working Capital Management

Finance chiefs are aiming to free up cash from their operations as the cost of credit increases

The Federal Reserve has raised its benchmark federal-funds rate six times this year.

Photo: photo: Kevin Dietsch/Getty Images

Higher interest rates are putting more pressure on companies to free up cash from their operations, a cheaper option than relying on credit.

By taking steps such as reducing inventory or more quickly collecting payments, companies unlock cash that can be used to pay down debt or fund investments. As interest rates go up and the cost of credit rises, companies are finding it more attractive to squeeze as much cash as they can from their own businesses instead of relying on external debt, executives and advisers said. “It’s always cheaper to access your own money,” said István Bodó, a director at business advisory firm Hackett Group Inc.

The Federal Reserve on Wednesday raised its benchmark federal-funds rate by 0.75 percentage point, bringing it to a range of 3.75% to 4%. The central bank has boosted short-term interest rates by the same amount at each of its past four meetings to try to tamp down inflation that is running at a four-decade high.

Rising financing costs are one of several factors pushing companies to improve how they manage working capital, alongside high inventory levels and persistent inflation. Among the more than 200 companies in the S&P 500 that reported third-quarter results as of Wednesday morning, inventory values rose 15% from a year earlier, to $729.2 billion, according to S&P Global Market Intelligence, a financial data firm. Average days of inventory outstanding increased to 85.1 days from 78 days over the same period, S&P said.

“When interest rates were at 0%, having excess cash or using lines of credit was easy and it was relatively inexpensive. Now, as we are quickly approaching a 4% or 5% interest rate environment, which we haven’t seen since 2007, executives are looking at their cash flows,” said Greg Kavanaugh, who oversees product development for global transaction services at Bank of America Corp.

Conagra Brands Inc., the Chicago-based packaged foods company that owns brands including Duncan Hines and Healthy Choice, is evaluating options to collect payments from customers more quickly and comparing the cost of doing that to its cost of capital, Chief Financial Officer David Marberger said.

During the quarter ended Aug. 28, Conagra’s days of sales outstanding—which measures the average time it takes for companies to collect customer payments—improved to 25.9 days from 27.9 a year earlier, S&P said.

Collections management will likely be a priority at more companies in the months ahead amid fears of a potential recession, said Hackett’s Mr. Bodó. Companies want to minimize their exposure to bad debt from companies that don’t pay their bills, he said.

While working-capital efficiency is always important, the rising-rate environment has put the topic higher on Conagra’s priority list, Conagra’s Mr. Marberger said. “The only difference now is that with your cost of capital being higher, sometimes the economics change, but we’re always looking at working capital,” he said.

During the third quarter, the cash conversion cycle—an estimate of the average time it takes to convert working capital to cash—deteriorated to 61.6 days among companies in the S&P 500 that reported financial results as of Wednesday morning, according to S&P, compared with 55.4 days a year ago.

“As rates have moved considerably higher, our corporate clients have even more of a need to become as efficient as possible with their cash,” said Michael Berkowitz, a managing director in the treasury and trade solutions division at Citigroup Inc., the New York-based bank.

Timken Co. , a North Canton, Ohio-based maker of bearings and industrial motion products, looks to reduce its inventory levels as part of a broader focus on improving working-capital and asset efficiency, said Phil Fracassa, the company’s finance chief. The value of inventory on the company’s balance sheet climbed 16% during the quarter ended Sept. 30 from a year earlier, to $1.13 billion. Days of inventory outstanding rose to 129.6 days from 113.7 over the same period, according to S&P.

“This wasn’t as big a deal when rates were at 1%, but now, at over 4%, it matters,” Mr. Fracassa said, pointing to the company’s short-term borrowing rate. That rate currently stands at 4.6%, according to Timken. “Working capital management comes more in focus,” Mr. Fracassa said, as it costs more for companies to draw on their revolving lines of credit with today’s higher rates.

Goodyear Tire & Rubber Co. ’s inventory levels increased during the latest quarter because the Akron, Ohio-based tire maker replenished its stock and grappled with higher inflation, executives said during an earnings call Tuesday. The value of inventory on the balance sheet rose 41% during the quarter ended Sept. 30 from a year earlier, to $4.86 billion.

The company doesn’t expect to tie up as much cash in inventory in the year ahead, CFO  Darren Wells said during the call. The company has been working to restock its inventory from the second half of 2021 through earlier this year following a strong period of sales. “It was kind of the unique rebuild period for working capital,” Mr. Wells said.

Write to Nina Trentmann at nina.trentmann@nzm7.com and Kristin Broughton at Kristin.Broughton@nzm7.com

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