Cash on the chip: working capital in technology
Review of working capital
performance in technology
Progress in working capital has been uneven among technology segments and companies.
Since 2002, technology companies have reduced their working capital levels by 27% as measured by cash-to-cash (C2C). Improvement was evident in six of the seven segments reviewed over this period, with only the communications equipment segment showing an increase in C2C.
Some of the more noteworthy shifts include:
- Diversified technology
This segment reported, by far, the largest reduction in working capital levels, with a drop in C2C of 34%. This strong showing was partly driven by the positive impact of the change in the product sales mix, with software and services now contributing for 53% of overall sales versus 44% in 2002.
- Computer equipment
C2C for the segment improved by three days, reaching a negative figure of four days in 2010 compared with a negative figure of one day in 2002. Performance, however, has been varied among companies.
Significant progress was achieved by large companies such as Apple and EMC, but this was partly offset by deterioration in performance for Dell on the back of a gradual change in its business model toward enterprise solutions.
- Communications equipment
This was the only segment reporting a weaker working capital performance, with C2C rising by 10%. This deterioration came primarily from higher levels of receivables (DSO), owing to the impact of ongoing consolidation of the customer base and increasing sales into higher credit risk segments of the market.
Also, there were financial difficulties among a very significant customer base for this segment (government entities). Changes in the sales mix also played a part. Progress in inventory (DIO) was mitigated by a reduction in levels of payables (DPO).
It is also worth noting that cash levels (when considered in the broader context of cash and working capital management) are currently elevated across the industry. In 2010, cash levels accounted for about 30% of total assets and sales — equivalent to 112 days of sales.
Although this overall ratio has remained almost unchanged since 2002, there are large variations among segments, with communications equipment and computer equipment showing significant increases in cash, and software reporting a significant decrease.
Change in WC performance across the industry, 2002–10
Source: EY analysis, based on publicly available financial statements
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