Working Capital Report 2017/18

Pressure in the system

Unlocking enterprise value through working capital management

Why it matters

Working capital is the cash tied up in the everyday running of a business. The ability of a company to keep low levels of working capital and still satisfy business requirements can result in higher returns on invested capital and more cash to fund growth.

If all companies in our study were to improve their working capital efficiency to the next performance quartile, this would represent a cash release of €1.2 trn. This means that global companies would have enough cash to boost their capital investment by 48% - without the need to access additional funding or put pressure on cash flows.

What’s the story?

Looking at the financial performance of the largest global listed companies in the last 5 years, we noticed three worrying trends:

1) Deterioration in ROCE

We’ve seen a reduction in the Return on Capital Employed (ROCE) of global listed companies. Whilst profitability is at a 5 year high, leverage has dramatically increased, which has led to the aforementioned pressure on returns. Improving working capital management (WCM) can be the key to reducing debt burdens and improving returns.

2) Reduced investment

In the same 5 years, CAPEX (as a % of revenues) has plummeted, as companies appear to be managing operating cash flows by cutting investment. In the long run, this will leave companies under-invested, which poses a threat to their growth. By optimising working capital global companies can release the necessary cash to fund investment while at the same time managing operating cash flows.

3) Working capital propped up through payables stretch

Whilst working capital days have not changed significantly in the last 5 years, having deteriorated by 0.8 days, it appears this may have been achieved in a manner which is placing increased pressure on the supply chain. Days Sales Outstanding (DSO) and Days Inventory On-Hand (DIO) have both worsened in the 5 year period, with Days Payables Outstanding (DPO) dramatically increasing to offset the deterioration on the asset side. Higher DPO levels may be indicative of increased creditor stretching activity, which might not be sustainable in the long term. Additional focus on the asset side of the balance sheet (receivables and inventory) may be warranted as a means of releasing cash and efforts to optimise payables should consider the impact on the supply chain.

How does my company rate?

Find out how you compare with your peers in our interactive data explorer, with breakdowns by company size, territory and industry.

loading-player

Playback of this video is not currently available

Share:

 

How does my company rate?

Find out how you compare with your peers in our interactive data explorer, with breakdowns by company size, territory and industry.

 

NWC days Display:

How we can help

We help our clients to deliver the following outcomes:

  • Rapid identification and realisation of cash and cost benefits across the end to end value chain (commercial terms right through to transactional processing)
  • Optimised processes that underpin the working capital cycle
  • Visibility on performance through leveraging analytics
  • Capability to identify opportunities, control performance and track benefits on a sustainable basis
  • Creating and embedding a ‘cash culture’ within the organisation, optimising the trade‑offs between cash, cost and service

Contact us

Daniel Windaus
Partner, PwC UK
Tel: +44 (0) 7725 633 420
Email

Rob Kortman
Partner, PwC UK
Tel: +44 (0) 7803 859 001
Email

Stephen Tebbett
Partner, PwC UK
Tel: +44 (0) 7717 782 240
Email

Follow us