Working Capital management in Indian companies: Is it all tied up?

The pandemic has adversely affected working capital cycles across sectors globally and a similar pattern can be observed in India. In the 12 months ended 30 Sep 2020, businesses in India saw a deterioration in the cash to cash cycle by six days on year on year basis. This was driven by deterioration in both receivables and inventories. Large number of organizations have proactively stretched their payables cycle in order to preserve liquidity.

Several levers can be deployed for optimising working capital which can free up cash to manage the disruption, helping companies rebound much strongly from the crisis.

Businesses stretched their payables to manage working capital during the pandemic

Businesses have tried to balance their working capital requirements by increasing payables, to offset increased inventory balances and reduced collections. As per our analysis, 69% businesses increased their payables cycle in the 12 months ended 30 Sep 2020, when compared to the prior 12-month period.

Whilst stretching payables helps manage short term liquidity requirements, it is not always the most efficient strategy. Increasing payables cycle hinders supplier relationship and can create liquidity challenges for suppliers thus compounding supply chain risk

It also may prove to be an expensive strategy since the company may forfeit any purchase discounts offered for on-time or early payments. Hence, it is important for businesses to optimise receivables and inventory, thus minimising the need to manage liquidity by extending payables and achieving a sustainable improvement in working capital.

Small enterprises have seen the biggest impact of pandemic on working capital performance

While there has always been a considerable difference between working capital performance of small, medium and large enterprises, the small enterprises have seen an even greater impact of COVID on their working capital. Cash to cash cycle for small enterprises deteriorated by 14 days as result of pandemic, even though these companies stretched their payables cycle by 16 days to preserve liquidity.

Large and medium enterprises have experienced a relatively smaller impact on their working capital from the pandemic. Such enterprises enjoy greater bargaining power which along with comparatively better processes and systems allows these companies to proactively track and control cash and working capital.

9 out of 12 sectors saw an increase in inventory holding

A reduced demand for goods during lockdowns caused inventory build-up especially for non-essential products, as companies took time to re-adjust their production levels to the changing demand scenario.

The majority of the sectors experienced deterioration in DIO during the period. 9 out of 12 sectors considered for the analysis saw an increase in DIO, indicating increased inventory holdings, combined with slower turnover.

Increased levels of inventory may lead to higher holding costs as well as risk of obsolete inventory. Readjustment of product portfolio to customer demand, dynamic scenario planning, developing surplus inventory campaign are some of the levers that companies can use for effective inventory management.

Some sectors were able to proactively manage their working capital

While most of the companies faced challenges in managing their working capital effectively during the pandemic, some sectors were able to pro-actively adjust the operations to preserve working capital and improve overall liquidity.

Companies in automotive sector realigned their production levels early on as per the lockdown demand, which helped them keep their working capital cycle in control. Chemicals sector companies got the benefit of a diversified product portfolio & capabilities which helped in effective management of inventory. Cement & building products companies took conscious decisions to stop selling goods on credit and focused collections efforts, which helped them reduce impact of the pandemic on working capital.

In addition, the disruption caused by the pandemic led to an increased demand for technology solutions such as collaborative and digital tools. This led to an increase in the revenues for technology sector, hence improving the cash to cash cycle for majority of the companies.