PWC presented earlier this spring two interesting Working Capital Studies done 2017/18; one Global survey and one covering The Nordics. The findings are based on data from a large number of companies from all over the world over the last 5 years.
Main findings in the Global study are:
Reduction in Return on Capital Employed (ROCE) of global listed companies
Profitability is at a five year high
Leverage has dramatically increased
Capital expenditure (CAPEX) has plummeted
Lower expected future growth?
Working Capital Days (WCD) have not changed significantly
DSO and DIO worsened by 5 days
DPO dramatically increased
PWC argues that by improving working capital the companies in their study would have enough cash to boost their capital investments by 48% representing a cash release of EUR 1.2 tr., and at the same time the debt burden could be reduced and the returns improved. The supplier side seems to be under pressure as of higher DPO levels, and the whole supply chain is strained. The key to achieve higher returns is to free up capital tied up in working capital.
If suppliers are expected to be the source of future financing for the NWCD by offering further credit days (DPO), the suppliers will eventually buckle under if they are not supported by sufficient supply chain financing. If the future trend is to keep passing on the burden of financing down the chain this is unsustainable in the long term.
PWC asserts that each player has to focus on their own internal efficiency, and their own NWCD performance.
The study shows differences by sectors and industries broken down to change in ROCE and NWC, and also presents data on top, median and bottom performers in DSO, DIO and DPO.
Company size is also given attention, and the large companies generate a higher level of ROCE than the medium and small enterprises as well as performing better on NWCD. This supports general assumptions such as economies of scale, and also points on the relative strength in negotiation situations with typically many small supplier companies being dominated by the large buyer companies.
PWC points out that the finance function has been the responsible party for solving working capital issues, but “many of the underlying drivers are operational rather than financial”. To find these underlying drivers data needs to be analyzed, the whole value chain needs to be thoroughly examined, and internal routines and working processes have to be reviewed. This is where each organization can find its “gold” buried in order to find areas to be changed resulting in lower NWCD. PWC’s study has found that only 24% of finance time is spent on these important issues – insight-generating activities, and concludes with the following:
"How leading finance functions are pulling ahead:
Building a clear role for business partners with the right skills to impact business decisions.
Investing in emerging technologies (e.g. data analytics, tailored collections pathways and robotic process automation).
Driving behavior and cultural change across the organization.
Driving large scale business transformation based upon sound financial analysis and measurable benefits. "
Each continent is commented on in the study.
Europe is considered stagnant; increased debt, reduction in Capex, flat WC, reducing ROCE.
Findings in the Nordic study:
Similar to the global study PWC reports:
Reduction in ROCE, although lesser than found in the global study.
Profitability at a 5 year high
Capex lower than the global level for the last 4 years
NWC performance deteriorated by 3 days, and DPO stretched
Threat of under-investment and future growth.
How do we perform compared to our Nordic neighbors?
Change in NWCD YoY 15/16
“Norway was the only market in the region that managed an overall improvement in NWC days YoY, if only a small one. ROCE also continues to move in the right direction for Norwegian companies.
However, challenges are out there as revenues continue to decline driven largely by the Energy & Utilities sector which in Norway did at least manage a reduction in NWC days.
Furthermore, whilst NWC days have improved, the same worrying increase in DPO may be masking underlying issues in DIO which increase significantly YoY. “
All the countries are commented on in the survey.
If you find this resume interesting and want to know more about the findings of PWC, here are links to their studies:
PWC’s global and Nordic studies are available here: