Opportunities to improve working capital performance

Listed companies around the world could release €950 billion ($1.05 trillion) from their balance sheets by making improvements in their working capital performance, according to a survey by PwC. Optimising working capital efficiency would enable organisations to overcome funding constraints and adopt a longer-term approach.

The annual report, Bridging the Gap looked at the financial statements of 10,215 listed companies worldwide and identified four key factors which influence a company’s working capital performance. These are the industry sector they operate in, the economic maturity of the region, the size of the company, and the significance management places on cash and working capital.

The 2015 report shows that working capital performance has improved for the first time since 2010. The improvement contributed to an increase in cash-on-hand of 11.3% from €2.85 trillion ($3.14 trillion) to €3.17 trillion ($3.5 trillion).

The improvement in performance was driven by reductions in receivables and inventory. Days of sales outstanding, the average number of days a company takes to collect cash after the sale of goods or services have been delivered reached a five-year low, at 43.6 days. And days of inventories on hand, a measure of how long it takes to convert inventory into sales, has decreased to 52.4 from 53.2 last year.

The study found that the gap between top and bottom performers is widening. On average, top working capital performers also have 76% more cash-on-hand.

Companies in Asia have seen a significant deterioration in working capital performance in the past five years, and working capital requirements relative to the size of the company have increased by 16% in that period. Asian companies also have poor cash conversion efficiency compared to other regions. More than one-third of the €950 billion ($1.05 trillion) that could be released from the balance sheets of listed companies by addressing poor working capital performance can be found in Asia.

Small vs. large firms

In the past five years, the gap between the working capital funding needs of small enterprises and large firms has widened to 10.6%, from 7.6%. While large corporations have improved their working capital performance, that of small enterprises has deteriorated sharply.

Small companies are at a disadvantage, as they have to rely more heavily on external debt to close the funding gap and experience comparatively higher interest rates when they do so.

SMEs already tend to have high working capital requirements relative to the size of the company, and that situation is deteriorating. In addition, they have lower cash conversion efficiency to convert EBITDA into cash.

Furthermore, their return on capital, at 4.3%, lags behind that of large corporations, which stands at 7.3%.

Addressing their working capital inefficiencies would help SMEs generate the cash to break the cycle of dependence on external debt, the report suggests. Failure to optimise working capital efficiency could have a serious impact on the ability to fund day-to-day operations.

Areas for improvement

To sustain recent revenue growth rates (for example, last year’s stood at 5.1%), the companies in the survey will need €237 billion ($261 billion) of additional working capital in the coming year alone. The authors of the report identified the following opportunities to improve working capital performance and unlock funds:

Receivables. Although days of sales outstanding is down to a five-year low, there are further gains to be made in the following areas: billing timeliness and quality, dispute resolution and root cause eradication, trade-offs in logistics and inventories, securitisation and outsourcing, and terms and conditions.

Inventory. Although the figure for days of inventory on hand has improved, there is still work to be done. Opportunities to reduce inventory often go overlooked as companies tend to focus on supply chain efficiencies.

Payables. There are opportunities to leverage new developments in supply-chain finance, dynamic discounting platforms, and overall supplier performance (such as goods in transit, inventories, and returns).

Return on capital. The study identified a significant deterioration in return on capital from 8.2% in 2010 to 7.0% in 2014. The authors expect companies to put greater emphasis on cost savings going forward.

Samantha White ( is a CGMA Magazine senior editor.