Daniel Windaus, senior director of REL, tells GrowthBusiness: ‘If you have financial indicators that refer to one point in time, companies will make sure they reach their targets by that point. Management will get their bonus and investors will see the numbers they want, but it is not sustainable, and it is not the best thing for the company.’
REL’s study of 145 European public companies analyses their “days working capital” (DWC), or the company’s reported working capital divided by an average day’s turnover. The companies’ DWC decreased by 6.9 per cent in the fourth quarter of 2006 compared to the previous quarter, indicating that they had less money tied up in relation to their sales, pleasing analysts and investors.
However, in the first quarter of 2007 companies were back to square one, with an increase in DWC of 6.9 per cent.
The study concedes that some industries are seasonal and can justify their uneven performance. But it goes on to argue that others are manipulating their results purely to impress analysts or boost managers’ bonuses.
For example, construction and engineering companies’ DWC decreased 23.6 per cent in the fourth quarter of 2006, but followed this up with a surge of 109.6 per cent in the following quarter. Another industry guilty of game-playing, according to the figures in REL’s study, is IT services, which improved its DWC by 3.3 per cent in the final quarter of last year, followed by a deterioration of 34 per cent.
Click here to read more about the games companies play to improve their year-end results.