Playing the float still rampant


When it comes to the financial close, financial units within big public companies tend to scramble, hunting for revenue and hopefully earnings.

There's really no question that the industry has become rather obsessed with hitting short-term targets. The annual financial close is not a time for an employee to revive the debate about whether companies are overly focused on short-term gains to the detriment of long-term investment; he or she will get short shrift.

REL, a division of The Hackett Group, has released a study that concludes that many companies try to "game the system" at year-end, artificially improving their balance sheets by manipulating receivables, payables, and inventory. If this takes place, it likely takes place quarterly as well. REL's research, which examined working capital management at 979 large publicly traded companies, found that nearly half of all companies in the study showed evidence of year-end gamesmanship.

"These companies improved working capital performance by 10 percent in Q4 2011, adding $52 billion to their balance sheets, or an average of $111 million per company. But in Q1 of 2012, these same companies saw working capital rebound dramatically, worsening by 11 percent, or $53 billion, an average of over $113 million per company," according to a release.

The techniques range from deep discounting and extended payment terms on sales to simply "losing" supplier bills. Much of this is old-fashioned "playing the float," delaying payables by any means possible and doing whatever it takes to ramp up receivables in time to make a difference.

Other games include companies taking the dramatic step of shipping orders early in order to reduce inventory, regardless of when the customer has asked for them. The big issue here is whether any of this activity lapses into illegality. In any case, this isn't an ideal way to run a company, but hitting targets are important. 

For more:
-see this release