Working capital: improvements front and centre amidst challenging conditions
Our annual working capital analysis found there has been an overall improvement of around 10% across the top 200 ASX companies equivalent to $4 billion.
Trends in working capital over the past few years have appeared like swings and roundabouts, with last year showing a significant swing towards cost control and cash and consequently an acceleration in improvement in working capital.
Given Australian companies are operating against a backdrop of capital constraints and cautiousness, it is likely the focus on improving working capital will continue. This is further proof that working capital management has earned itself a permanent position on the executive and boardroom agenda.
While there had been an overall improvement in the past financial year, this had been driven by 60% of companies ‘over performing’ in working capital. Forty per cent of companies were still experiencing deterioration in working capital, as a result of tougher economic conditions, changes in sector dynamics or in some cases being slow to react to the need of focusing on managing cash. If you took each company back to its best historical working capital position, companies could tap into a pool of more than $9.5 billion.
Miners lead the way
The mining sector, making up about 35% of the ASX 200, was largely responsible for leading the improvement charge by building on the positive results of the year before. With a sharpened focus on cost reduction and capital management in the sector, the miners have taken big steps to move inventory swiftly and optimising payables.
On the flip side, the utilities industry has seen deterioration in working capital over the past 18 months largely as a result of energy price hikes and the consumer lag affect on receivables. Increasing electricity bills has meant that consumers are taking longer to pay bills, or not paying them at all – which has placed significant strain on working capital.
Another sector that has shown signs of deterioration in working capital is ‘industrials’. The composition of this group in the ASX 200 is chiefly mining services/suppliers who have faced a double hit with the slowing demand for commodities and an increase in working capital savviness from miners.
Oversights in offshoring
Offshoring, while hardly a new practice, also bears a significant impact on working capital. With companies continuing to offshore back office finance operations with the aim of unlocking efficiencies, many have lost oversight of the drivers of working capital.
The issue with offshoring or outsourcing working capital was that for some organisations it is a case of ‘set and forget’. Without clear reporting and communications processes, companies can fall victim to significant leakage in working capital.
Outlook for working capital
It’s been an interesting few years in this space as the more progressive companies have spent time understanding the detail and drivers of working capital. Working capital management is essentially about businesses managing transactions (invoicing customers, paying suppliers and buying or making inventory) in the most cash effective way, and the companies that have spent time to identify and map these drivers are starting to bank the dollars in a big way.