Public companies spend an enormous amount of effort trying to meet estimates of quarterly and yearly performance. Beat expectations-, and investors reward you. Fall short and so will your stock price. Pressure is so intense that many companies have long played games to make their numbers – especially working capital numbers – look good at year-end.

Our recent study of 979 of the largest publicly traded U.S. companies (excluding financial companies) shows that companies have reduced their net working capital (NWC) from Q3 2011 to Q4 2011 by $24 billion only to let it increase in Q1 2012 by $42 billion. The study also showed that 47 percent of the companies engaged in this year-end game-play decreased days working capital (DWC) from Q3 2011 to Q4 2011 and watched it soar in Q1 2012. Among the 459 companies that played this game, NWC fell by $52 billion from Q3 2011 to Q4 2011 only to bounce right back in Q1 2012 by $53 billion.

Ironically, the amount of time, effort and money that companies invest in this practice every quarter-and year-end far surpasses the effort to establish processes and procedures that, when run efficiently, help create conditions for working capital performance that would minimize and probably eliminate the need to play these games.

Playing the game
The clear evidence of this gamesmanship is demonstrated by the significant reduction of working capital occurring in the final quarter of the year, followed by an...

Read more (PDF 7 pages):
http://www.relconsultancy.com/research/2012/gamesmanship/REL2012-The-Earnings-Game.pdf