$ 5.5 trillion in cash tied up in working capital


According to PwC’s latest annual working capital study, the amount of cash tied up in working capital – the cash that businesses need to run their day-to-day operations – has increased dramatically during the pandemic, as problems logistics, supply chain and inventory are plaguing global markets. . A summary of the main findings of the report in five graphics.

While the total amount of cash in working capital has remained stable at $ 5.5 trillion, the turmoil of the pandemic has seen net working capital days reach an all-time high in 2020.

There are, however, significant sector variations in the performance of net working capital days. Between 2019 and 2020, 10 of the 17 sectors categorized by PwC experienced a deterioration in net working capital days. Four of these sectors saw double-digit deterioration – Aerospace and Defense, Hospitality and Leisure, Automotive, and Energy and Utilities – reflecting the shock suffered in these sectors during the initial phase of the pandemic.

Of the industries with declining net working capital days, all but one (Metals and Mining) also experienced a deterioration in return on invested capital (ROIC).

Change of NWC days and change of ROIC from 2019 to 2020

The evolution of working capital reflects what happens when companies seek to leverage in the short term. As customers delayed payments, Days Sales Outstanding (DSO) – the time it takes to pay invoices peaked in five years, rising to almost eight weeks (54.1 days), up seven for hundred per year.

At the same time, and partly as a ripple effect, companies stretched their creditors, with overdue days (DPO) also increasing by 7% to over 10 weeks (72.2 days), breaking a trend four years to shorten payments. days. With increased uncertainty over demand and supply, the time inventory remained on the shelves before being sold increased by five percent to over eight weeks (59.5 days).

DSO, DIO and DPO trends

Commenting on the developments, Daniel Windaus, Partner at PwC, said: “The deterioration in working capital performance reflects the exceptional volatility experienced by many companies. The pandemic has also exposed the slow response of supply chains to external shocks. Replenishment times and strategies are stretched even for regional supply chains, which means that security, stock and inventory policies need to be adjusted on a regular basis.

“The mismatch between the cash outflow from sourcing materials and producing inventory ready to sell, and the cash collected on sales is growing.”

Notably, while working capital consumed more of the capital, strong government support and readily available debt have enabled many companies to maintain a strong cash position – “for now at least,” he said. declared Windaus. Cash days (represented as days of operating expense coverage) increased by 14 days to a five-year high.

Trend in liquidity and financial performance

Windaus: “With the end of government aid, it’s important to keep a close eye on capital efficiency and liquidity. The ROIC took a hit, falling 1.4% to its lowest level in five years.

Looking ahead, finance, supply chain and purchasing executives told PwC researchers that improving the efficiency of their working capital was one of their top priorities for the year ahead, ahead of cost savings and diversity and inclusion.

What are your change management or restructuring objectives?

Windaus sees several challenges that companies will have to overcome in order to optimize their working capital chain. “There is a perfect storm of supply constraints and rapidly changing consumer demand. Businesses need to re-evaluate planning and production. Shortages of raw materials will inevitably lead to stockouts and operational disruptions in manufacturing companies. “

“Logistics, volatility, as well as the pursuit of net zero, are likely to lead to an increase in near offshoring wherever possible, as well as an increased emphasis on the stability of critical external suppliers. “

For its analysis, the consulting division of PwC (a global professional services company) analyzed the working capital positions of more than 20,000 companies around the world.

About Donnie R. Losey

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