Working Capital

Working capital performance has declined by 7.1% since FY 2014 for listed companies in Middle East

Yet for another year, listed companies in the Middle East have up to AED 121 billion of excess cash trapped on their balance sheet in their operational working capital.

Working capital is more important than ever now, as our study shows increasing pressures on the margins with the EBITDA margin declining for 5 consecutive years at a 8.1% compounded decline rate. Working capital remains the cheapest source of cash and with margins under pressure, cash flows are suffering leaving businesses with no other option than to cut CAPEX expenditure, slow down dividend payouts or seek funding from shareholders in the form of equity or externally as debt.

Working capital performance at its lowest point in 5 years despite another year when companies have stretched the creditors’ cycle (accounts payable).  Continuing this trend of stretching payables to suppliers will be damaging to the local economy, with smaller players suffering the most and going out of business due to cash flow pressures. There are more sustainable and efficient ways of addressing operational efficiencies in inventory and accounts receivables, which could release working capital pressure for Middle East corporates.

Around 49% of the companies have improved their working capital year on year, however, sustainable working capital improvement remains elusive for the vast majority of Middle East companies. Only 6% of companies in our survey sustainably improved working capital days for 3 consecutive years, and a mere 2% for 4 consecutive years.

Days inventory outstanding (DIO) has been the main driver of year on year deterioration of working capital efficiency with 4 days (4%) increase. Days sales outstanding (DSO) has remained stable at the highest point in 5 years, as companies struggle to enforce and operationalise credit policies and effective collection strategies. 

There are notable differences in collection speed based on the company size, where very large corporates collect on average 30% quicker than the rest of the businesses and up to 50% faster compared to small companies. We are noticing an improvement year on year for most of the Business to Customer (B2C) sectors (Retail, Hospitality & Leisure, Energy and Utilities or Communications), but the Business to Business (B2B) sectors are mostly deteriorating with Engineering and Construction , Healthcare (insurance based payments) and Industrial Manufacturing. 

DIO has increased in most sectors , both B2C and B2B, showing again challenges from businesses to predict their future demand and plan purchases or production accordingly. We are seeing more and more acute issue with the mix of inventories, where fast selling products are performing well but the longer tail causes the issues. Similarly a lot of clients are facing issues due to long and burdensome internal processes and approvals increasing the end to end lead times. 

The creditors cycle remains the go to areas of working capital for corporates in the Middle East to drive improvements. Yet another year where credits are stretched not only by very large corporates but across the board at all sizes, sectors and countries. We are noticing an increasing trend of poor behaviour in delaying payments to suppliers rather than addressing other options in the debtors or inventory cycle or even using financial products to help extend the creditors cycle whilst actually helping the suppliers access cash quicker. 

With a significant portion of international spend typically based on letters of credit, underlying non-international creditor days are significantly greater, creating a more acute  cash pressure on local suppliers which in turn affects the health of the local economy overall. 

We have seen a number of good initiatives from the UAE government forming committees which shall address the complaints around late payments, but these are all in their incipient stages.

NWC development by company size category

Larger companies tend to outperform their smaller peers on working capital efficiency as they possess more resources to invest in process improvement and technologies. This is also evident from our study as the overall level of NWC days strongly correlates with company size.

NWC performance has deteriorated in 2018 for small and mid sized companies while large and very large sized companies have shown improvement in 2018. These large and very large sized companies are able to use their market power to improve NWC performance at the expense of their smaller peers. The deterioration in NWC days for small and mid sized companies is mainly driven by DIO, which increased by 5 days and improvement in NWC days for large and very large sized companies is driven by their ability to stretch the payables cycle.