Working capital management: Poor practices costing manufacturers billions

Posted on 9 Feb 2018 by Jonny Williamson

Global firms could have freed up as much as €177bn of cash during 2017 by improving working capital management (WCM), new study has shown.

Global firms could have freed up as much as €177bn of cash during 2017 by improving their WCM – image courtesy of Depositphotos.

Better working capital management (WCM) could have created a cash opportunity of €5.1bn for UK manufacturers compared to €26.5 bn across Europe, the UK findings from a PwC’s survey have found.

The analysis also reveals a number of worrying trends for the industry and its investors, such as its ongoing struggle to improve its average returns on capital employed (ROCE), which has fallen by 5%, from 8% in 2012 to 7.6% in 2016.

And, at a time when manufacturers across the world are benefiting from rising global trade, the industry’s level of investment – measured in terms of capital expenditure (CAPEX) – has also continued to decline over the past five years, putting its future success at risk.

Cara Haffey, who leads PwC’s industrial manufacturing sector said: “It’s understandable – and often valid – for manufacturers to claim they don’t have the cash to hand to invest at the moment.

“But, as our report clearly shows, they are all too often failing to seize upon what is the most readily-available option to hand; better management of their working capital.

“This should be viewed as the first port of call when it comes to funding investment in new technologies, for example, as it doesn’t require access to additional revenue sources or put pressure on cash flows. And with as much as €5.1bn sitting within UK firms, now is the time to release it.”

Competitiveness, cash and culture

Compared to other industries, the link between working capital, returns and investment is usually particularly strong among industrial manufacturers. But it is not always the case as the report has shown.

It has revealed that the widespread assumption that any lack of improvement in WCM is simply due to ‘inventory issues’ is a fallacy.

Instead, it highlights a continuing slowdown in the collection of customer payments with receivable days – or ‘days sales outstanding’ – now at their highest level for five years.

According to the report, this could due to firms granting customers more generous terms or being less stringent than other sectors when it comes to collecting cash owed – an issue that can be easily remedied.

And with the industry recognising the need to do more to embrace the opportunities offered by Industry 4.0 to sustain competitiveness and long-term stability, the lack of readily available cash resources can pose a significant hurdle.