2018 Working Capital Survey

The Hackett Group has released the 2018 US Working Capital Survey. Overall, working capital management has improved, with the cash conversion cycle dropping to 33.8 days, a 4 percent improvement. Day's payable has increased from 53.5 days in 2016 to 56.7 days in 2017, while days' payables outstanding increased from 37.8 days to 39.5 days. The inventory period also increased slightly, from 50.7 days to 51 days.

2018 Alexander Hamilton Awards

The 2018 Alexander Hamilton Awards from Treasury & Risk have been announced. The gold award went to Herc Rentals, which set up a treasury group to sales for a billion-dollar company less than six months after its divestiture from Hertz. The silver award went to Avery Dennison which centralized its European treasury functions, resulting in significant savings, and improved foreign exchange processes. Finally, OpenText was awarded the bronze award for streamlining its treasury and setting up processes for the integration of future acquisitions.

Slow Earnings Repatriation

One goal of the Tax Cuts and Jobs Act of 2017 was to increase repatriation of overseas earnings. Broadly speaking, new repatriated earnings are not subject to additional taxes that were in force under the previous tax system. A common misconception is that most of the $3 trillion in foreign earnings earned held abroad by U.S. companies was sitting in stockpiles of cash. In the second quarter of 2018, companies repatriated $169.5 billion, which is up significantly from the $34.9 billion in the second quarter of 2017, but down from the $294.9 billion repatriated in the first quarter of 2018. Several factors have reduced the expected tax windfall, including a company’s desire to leave cash overseas for investment to foreign laws that limit a company’s ability to repatriate cash to the U.S.

Retirement Planning

We know that most students are interested in personal finance topics, so we like to post on personal topics occasionally. Consider your retirement. How much should you have saved for a comfortable retirement? A recent article discusses this topic and reports some conflicting conclusions. If you notice, Fidelity suggests that you have 10 times your pre-retirement salary saved at age 67, while the next paragraph notes that, according to Tony Robbins, you need 20 times the annual amount you want to spend in retirement. These two rules of thumb are consistent only if you withdraw half of your current pretax salary in retirement. Of course, these are only rules of thumb. Life expectancy is an important consideration. For example, on average, women live longer than men, which suggests women need more money for retirement for the same withdrawal amount. Another consideration is whether you are willing to dip into principal, which means you would need less than if you do not wish to dip into principal. You also need to consider the amount of risk you are willing to take with your investments. If you are only willing to invest in a savings account, you will need to have more saved, on average, than if you are willing to take more risk and invest in stocks.

We would like to close with a rule of thumb calculation for you. Research into retirement withdrawals using historical market returns suggests that withdrawing 4 percent of your retirement portfolio value per year has generally supported at least 30 years of withdrawals, assuming the portfolio is 60 percent or more common stocks. We should state that many retirement planners would consider this a relatively risky portfolio in retirement. If you are willing to accept this risk, what multiple of annual retirement spending does this suggest you need for your retirement portfolio? What happens to this multiple if you are more risk averse?

Volkswagen's Option To Abandon

Volkswagen recently announced that it would discontinue production of the iconic Beetle, which was first manufactured in the 1930s. The Beetle was produced until 1978, when Volkswagen first dropped the car from production in Germany. The car was reintroduced in 1997. With sales of only 60,000 cars per year, evidently the NPV of continuing to produce Beetles was negative. Remember, the option to abandon exists with any project, although as the previous reintroduction of the Beetle shows, the abandonment need not always be permanent.

Activist Bondholders

Because bondholders have a fixed claim on assets and no vote in company operations, they tend to be passive investors in companies. However, a new type of investor, the net-short bondholder, has become more prevalent. A net-short bondholder will buy a bond and at the same time take a larger short position in the same company's bonds. A short position benefits when the asset value decreases. Thus, the investor will lose in the long position but gain a larger amount in the short position. The investor will then implement a claim if the company violates any covenant. For example, Aurelius Capital Management took a net-short position in Windstream's corporate debt and then claimed a violation of a covenant two years prior. Windstream had even undertaken actions to satisfy bondholders that held the bonds when the violation occurred. In short, companies now must be even more careful when writing covenants for bonds.