Why it matters
Cash is the lifeblood of any company. It’s more important than ever for businesses to optimise this fundamental aspect of financial performance if they’re to maintain a steady course in these uncertain times. Given that working capital is the cheapest source of cash, nothing is more vital than having a cash culture and good liquidity on board.
If all the companies in our study were to improve their working capital efficiency to the level of the next performance quartile, this would represent a cash release of €1.3tr. This would be enough for global companies to boost their capital investment by 55% – without needing to access additional funding or put their cash flows under pressure.
What’s the story?
Our study of the financial performance of the largest global listed companies over the past five years indicates that there are four challenges on the horizon:
1) Converting cash is becoming harder
While revenues are up by 10% on last year, this year we’ve seen a decline in companies’ ability to turn higher revenues into cash.
2) Capital expenditure is continuing to decline
Capital expenditure (capex) as a percentage of revenues has plummeted during the last five years, suggesting that companies are managing cash flows by cutting investment. In the long run, this will leave companies under-invested, posing a threat to their growth. By optimising working capital, global companies can release the funds needed for continued investment without squeezing their cash flows.
3) The cost of cash is increasing
During the recent sustained period of cheap borrowing, the cost of cash may not have presented cause for concern. However, given the current outlook of fiscal tightening and uncertainty around global trade, now is the time for companies to shore up their balance sheets to be ready for all eventualities.
4) Working capital has improved only marginally – signalling a missed opportunity
The overall findings on companies’ Net Working Capital (NWC) performance reveal a small improvement this year of 0.4 NWC days. Companies have achieved this by turning the tide on Days Sales Outstanding (DSO) and Days Inventory On-hand (DIO) performance, both of which saw modest improvements of 0.1 and 0.7 days respectively – the first improvement in five years.
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.
Key findings
When we look at how the performance of different sectors has evolved over the last year, some have fared significantly better than others.
In fact the overall balance is positive, with 11 sectors out of 17 having achieved an improvement in 2017.
While sector-level trends give us an indication of the challenges facing certain industries, there are wide variations in performance between different companies within each sector. We’ve broken this down further in our report:
See here for more industry insights
When it comes to working capital performance, size remains an important factor.
The gap between the largest and smallest companies in our study has widened from a difference in NWCD of 39.6 days in 2013 to 46.8 days in 2017.
The widely-held assumption is that large companies achieve this perfomance by using their spending power and market muscle to squeeze their smaller suppliers. The numbers actually show that small and medium-sized companies have much longer payables cycles than larger companies.
Read about the other drivers for the size gap
Within any given region around the globe there are wide variations in working capital performance, reflecting differences in market maturity, legislation and cash focus.
Based on the companies included in this year’s study, what is most notable is that Asia is continuing to represent an ever growing slice of the pie, underlining the continuous gravitational pull to the east.
Discover more about international trends in working capital
Until about two years ago, the post-crisis recovery story was mixed with strong growth in the E7* and disappointing growth in the G7**.
This, however changed in the middle of 2016, with growth advanced economies—and, in particular in the Eurozone—accelerating. Looking at the specific economies in turn though, paints a more nuanced picture.
The UK economic sentiment remains soft relative to the Eurozone. We expect growth to average about 1.5% per annum, somewhat lower than its estimated trend growth rate of about 2% per annum. This moderate growth outlook assumes that that the Brexit negotiations will proceed reasonably smoothly, and therefore that the UK will avoid an extreme, ‘hard Brexit’.
*E7: Refers to the seven large emerging economies of the world which are: Brazil, Russia, India, China, Turkey, Mexico and Indonesia.
**G7: Refers to a club of advanced economies which are: the US, UK, Canada, Germany, Italy, France and Japan.
Read more about the impacts of this around the world
The use of vendor financing to shore up suppliers or drive days payables is gathering pace.
Adoption rates have increased significantly since 2014, largely driven by increased uptake from companies below £5bn in annual revenues.
The primary motivation for companies to adopt Supply Chain Finance (SCF) continues to be the optimisation of working capital. This is in line with our finding of a sharp increase in DPO over the last five years. Improving supplier relationships, as well as the overall supply chain stability of the buyer were also key considerations when implementing SCF programmes.
Explore more on supply chain finance
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
DSO
How we can help
We help our clients to:
Identify and realise cash and cost benefits across the end to end value chain (commercial terms right through to transactional processing)
Optimise operational processes that underpin the working capital cycle
Implement digital working capital solution and data analytics
Achieve rapid cash conservation in crisis situations
Create a ‘cash culture’ and an upskilled organisation through our working capital academy
Roll-out trade and supply chain financing solutions.
