Last year, suppliers serving fashion businesses waited an average of 139 days to get paid, according to a new report.
That’s the worst number The Hackett Group, which authored the study, has documented since it started keeping records on these trends six years ago in 2017. Back then it was 110 before jumping to 114 the next year, falling back to 112 in 2019 and settling at 109 days in pandemic-hit 2020. However, Hackett intel shows that 2021—the year when vendors had all the power, merchandise was notoriously hard to get and everyone was packing planes full of fashion—turned in the best payment trend on record, with companies in the business of apparel, footwear and textiles squaring up supplier invoices in just 103 days, according to István Bodó, director at Hackett Group.
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Fashion’s 2022 performance marks “a significant deterioration compared to previous years,” Bodó said, noting that the “lower the number, the better it is for the organization.” These payment trends offer insight into a company’s cash conversion cycle and how efficiently businesses manage their money.
U.S. companies now have almost $1.9 trillion tied up in excess working capital, which means the value of their assets is that much higher than their liabilities. That nearly $2 trillion pot includes $666 billion in inventory bloat, $665 billion in payables and $531 billion in receivables, the Hackett study found. The top performers now collect from customers 42 percent (19 days) faster and hold 59 percent (41 days) less inventory but take 52 percent (25 days) longer to pay suppliers, according to the data.
Many companies tried to hoard cash during the pandemic by making suppliers wait a little longer to get a check in hand. Now, most businesses across sectors pay invoices an average of five days faster, for an 8 percent improvement, according to Hackett. The airline industry turned in the best performance, paying in two days last year instead of four in 2021. In fact, Hackett said 2021 was the year of the rare “triple crown” where companies improved all three working capital management metrics—receivables, payable and inventory.
But today companies are dealing with inflation, higher costs, supply chain disruption and geopolitical turmoil. This means suppliers can’t afford to be lax with partners trying to play around with payments. They’re justified in pushing back on companies hoping to push out payments.
“When inflation is so high, having very long payment terms is not too advantageous for the seller,” said James Ancius, also a Hackett Group director. Selling on “90 to 120” day terms leaves the supplier with little by the way of purchasing power amid hard-to-swallow inflation, which why is many are standing firm and cutting those numbers down to reality, he said.
On average, companies have 19 percent less cash on hand as a percentage of revenue, reversing the pandemic-era cash hoarding trend when businesses scrambled to shore up operations and throw money at debt. And the troubling payment performance trend is likely to worsen this year, with less supply chain financing credit available after the banking mini-crisis several months ago.
To better compete going forward, fashion companies should prioritize cash-flow management to optimize their working capital, Bodó said.
And they can start by cutting out-of-control inventory down to size after the industry’s stockpile surged 40 percent last year, when even the Walmarts of the world were stuck with so much slow-moving stuff they resorted to nixing billions of dollars in orders. With bloat ballooning across the sector, Ancius said, fashion showed a “significant degradation in payables outstanding.”
So how can firms in the clothing, footwear and textile business do a better job with inventory?
They can start by investing in tools to manage inventory and optimize stock levels when consumer tastes quickly shift. The upside to holding less inventory is having less stuff to put on clearance, which is the easiest way to kill margins. Moreover, full-price selling drives faster sales turnover. And having more cash on hand usually means companies can pay invoices faster.
