Effective working capital management integral to operational efficiency
- A review of the leading 500 companies in India reveals marginal improvement in working capital performance in 2013, as compared to 2012
- About INR 5,300 billion (about 12% of aggregate sales) of excess cash remains idly tied up in working capital processes of leading Indian companies
- Most Indian companies continue to see working capital as a financial and not an operational issue
- Effective working capital management strategies essential for companies to raise cash and improve operational efficiency
2 February 2014, Mumbai: A review of working capital performance among the leading companies in India during 2013 reveals a marginal improvement, as compared to 2012, with their cash-to-cash dropping by 2% according EY’s latest report on Working capital Management ‘All Tied Up India 2014’.
The report is based on the working capital performance of 500 leading companies in India. These working capital results were achieved in the context of a marked slowdown in the Indian economy during the year as well as challenging global economic and financial conditions.
Ankur Bhandari, Partner - Working Capital Advisory Services EY India says, “There is a natural tendency among many companies to blame tough business environment for poor performance as customers struggle to pay on time, supply chains fail to keep pace with falling demand, and suppliers seek to get early payments. Companies should pay more attention to working capital management as they seek to release cash to support operational cash flow demands, fund capex and improve bottom line.”
A review of the performance of the leading 500 companies in the country reveals that sales growth has halved, operating margins of the majority of the companies have declined, debt levels are continuing to rise and ROCE (Return on Capital Employed) is at a five-year low. Consequently, Indian companies have been scrutinizing their balance sheets and are actively seeking ways to enhance their cost efficiency, release cash and optimize the structures of their assets, the report states.
The report states that compared to their peers in the US, Europe, Japan and other Asian countries, Indian companies are at the bottom of global working capital performance. While this may be partly due to variations in their business models and geographic footprint, it also points to fundamental differences in the degree of management’s focus on cash and in the effectiveness of working capital management processes against the backdrop of rapidly changing business, financial market and regulatory conditions.
According to the report, not treating working capital as an operational issue, poor system data management, insufficient focus on continuously adapting business policies and processes to a rapidly changing environment appear to be the primary reason for the divergence in working capital trends between India and the US and Europe.
EY’s research also reveals a considerable disparity in the working capital performance of Indian companies within the same sector, which clearly indicates that there is potential for significant improvement. A high-level comparative analysis conducted by us reveals that Indian companies have up to INR5.3 trillion (US$97 billion) in cash unnecessarily tied up in their working capital processes. This is equivalent to 12% of their aggregate sales.
“Our experience shows that there still are a number of areas within management’s own influence that can be dramatically improved upon such as timely billing, credit blocks and proactive collection, establishing responsive supply chain to adjust inventory in real time with demand, and improved spend category management. This can lead to a substantial and sustainable cash release in a relatively short period of time. Otherwise, the high debt and related interest costs will continue to eat into the bottom line forcing working capital laggards to lose financial strength and eventually erode their ability to compete in the market”, adds Ankur.
The report also gives some suggestions on what companies in India should focus on in order to implement effective working capital management strategies to raise cash and improve operational efficiency. This will involve adopting a structured “root and branch” approach to improve their management of working capital. They will need to target all key operational levers and implement a robust supporting infrastructure, including focused metrics, aligned incentives and strong risk management policies. Other essential enablers include application of lean manufacturing and supply chain initiatives, effective management of payment terms with customers and suppliers, closer collaboration with each of their partners in the “extended enterprise,” globalization of procurement, and taking an approach that balances cash, cost and service levels.
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