EY Woman looking Up Stock taking Inventory in Warehouse

Five retail performance improvement strategies to release working capital

Retailers who make even small performance improvements can release working capital to fund their futures

In brief

  • Recent EY analysis shows retailers may be sitting on billions of dollars in trapped cash.
  • Even small performance gains can unlock working capital and allow companies to pursue technology investments and adopt sustainability measures.
  • By establishing a cash-focused culture and integrating this approach into decision-making, companies stand to grow and outperform competitors.

For retailers experiencing constant market disruption, improving working capital and cash flow has never been more important or more challenging. Have too much of it, and cash is unnecessarily trapped on the balance sheet that can’t be repurposed for better returns. Have too little of it, and you risk missing sales, impacting the brand and potentially losing out to the competition.

Recent EY analysis reveals that retailers may be sitting on billions of dollars in trapped cash. The study shows that if retailers could improve performance to align with their best-performing peer, there is an industry opportunity to release $225b of cash from balance sheets. Likewise, even small gains in performance by each retailer could unlock significant working capital. Liquidity, although buoyed by increased consumer spending, has been stifled as logistics value chains are sometimes unable to accommodate the flow of products to meet this demand.


Retailers may need to manage ongoing variability in both demand and supply, while at the same time, evolving and investing in the business to stay competitive. Companies are pursuing technology to improve operations and the omnichannel experience; adoption of sustainability measures to improve environmental, social and governance ratings; and organic and inorganic growth, but they also require funding.


Retailers that can drive working capital efficiencies to enable self-funding, while simultaneously balancing trade-offs, will gain competitive advantage.


Releasing trapped cash


Retailers are no strangers to balancing working capital objectives and trade-offs. Cash and profitability have always dominated executive discussions, and while profitability is often the priority, recent challenges have highlighted the importance of working capital, particularly with increased inventory levels.

To better understand the cash and trends in working capital, the EY organization recently analyzed the financial results of 150 North American retailers with $50m or more in annual revenue from 2018–21.¹ The analysis looked across key financial metrics, including days inventory outstanding (DIO), days payable outstanding (DPO) and the funding gap (DIO-DPO). These metrics help executives better understand not only how they perform against their peers but also how each retail subsector is trending.


Days inventory outstanding²


For many retailers, previous challenges of slow-moving inventory were replaced with widespread inventory shortages in 2020–21, which drove down DIO. This was a boon for some retailers as it helped draw down inventory closer to their peers, but in many cases, it meant lost sales and unsatisfied consumers. Less inventory is not always optimal, as determining product selection and availability across all channels requires a balanced approach. In mid-2022, many retailers have unbalanced inventory, with demand changing rapidly in response to inflation, which will require a more agile approach to balance consumer needs with financial performance.


Figure 1 demonstrates how supply restrictions reduced inventory days in 2020, which created an artificial improvement in 2018–19. In fact, the improvement can be better characterized by an imbalance, with many desirable items short stocked or on longer lead times. In 2021, an increase in DIO helped to reduce some of the imbalance but also posed a risk of trapping cash if the rebuild was not underpinned by effective demand and network planning.


Figure 1: Industry DIO trends (2018–21)

EY analysis reveals a wide range of DIO performance across and within each retail subsector (see Figure 2). The biggest variations were observed in home furnishings and home improvement retail, starkly compared with the very similar performance of drug and grocery retailers or department stores. Structural differences aside, EY experience has found many differences in the maturity of supply chains and planning processes at retailers with portfolio management, assortment planning, integrated business planning and return management processes. Low maturity companies will typically have higher days inventory and be unable to effectively meet customer experience expectations. If companies were able to develop strategies to move toward the best sector performance with respect to DIO, the opportunity is significant, with the potential to release up to $71b in cash flow.³

Figure 2: DIO performance variations across and within subsectors

In each retail subsector, companies with a higher DIO than the peer average should actively assess the reasons for underperformance, including developing an understanding of how current initiatives or investments will help to close the gap.

Days payable outstanding

DPO represents the average time to settle payments with suppliers following goods receipt and is often the first lever pulled when the objective is to manage liquidity. Industry analysis (see Figure 3) illustrates how in the last three years, DPO has increased the most for retailers that were the most impacted by the pandemic. Traditional brick-and-mortar retailers, including department stores (+31 days) and apparel retailers (+12 days), recorded the largest increases in DPO, a method to conserve cash. In contrast, discount retailers recorded a reduction in DPO at a time when sales have grown approximately 20%. Often, excess cash can be used to accelerate payments and often earn further cost reductions. 

Figure 3: Change in DPO and DIO performance (FY21 vs. pre-pandemic performance)

Payables will remain an important strategy for retailers to manage their funding gaps as they invest and explore innovation for customers and across channels. Many retailers have put a higher focus on DPO as a funding source recently (see Figure 4). In contrast to DIO, there is a much greater spread of company performance across each subsector, with leading retailers executing payment strategies, supplier segmentation and terms alignment more effectively than their peers. If companies were able to meet the best sector performance with respect to DPO, the opportunity is significant, up to $156b.⁴

Figure 4: DPO performance variations across and within subsectors

Like buy now, pay later options for customers, advances in supplier financing solutions can support flexibility for retailers to develop hybrid strategies that enable cash preservation in capital-intensive periods and gain above-average returns when cash is readily available. This is also advantageous to suppliers that can potentially tap into accelerated cash flow when they need it. An effective DPO strategy creates financial flexibility and can ultimately deliver both profitability and cash flow improvements.

The funding gap

While DIO and DPO are key metrics to monitor individually, it is also important to measure the two against each other. The funding gap (DIO less DPO) measures how long companies take to pay suppliers relative to the time it takes to convert inventory into sales. A positive value represents funding requirements. A negative value is not only possible but considered leading practice for certain retail subsectors.

Leading retailers have found ways to balance working capital management alongside profitability. EY analysis compared retailer funding gaps and observed a range of performance within the subsectors. Figure 5 illustrates that a small number of retailers have found a strategy to drive a negative funding gap (appear right of the line), with a greater proportion of these in faster-moving retail subsectors, such as grocery. Retail subsectors with longer supply chains will typically have positive funding gaps; therefore, it is even more important for these companies to develop strategies to close the gap.

The relationship between the funding gap and gross margin (see Figure 6) highlights how some retailers appear to trade off for a larger funding gap (additional working capital tied up) to support enhanced gross margin (identified in the upper-right quadrant, Figure 6). This could be through negotiating higher-order quantities for larger discounts or sourcing product from more distant regions at lower cost. Likewise, several retailers in the lower-left segment have a below-average gross margin but a leaner balance sheet. Analysis and the spread of performance suggest that there is not necessarily a direct correlation between funding gap performance and gross margin; however, when looking at individual subsectors, it is clear that some retailers have more effectively managed trade-offs. Apparel retailers with similar gross margins cover a wide spread of the funding gap. Alternatively, for drug, food and convenience retail, there appears to be a visible trade-off between the funding gap and gross margin.


Purposeful investment

Some retailers have more effectively managed trade-offs to achieve above-average results in both margin and cash management. However, with increases in supply chain costs and consumers wanting more choices than ever, keeping this advantage will be an ongoing challenge: one that will require innovation and investment.

Technology is at the heart of most retailer investment strategies, with store capital being redirected to accelerate the shift of omnichannel mix and flexibility for consumer choice and experience. But a key challenge will be how companies manage the change in strategy and determine that deployed capital will deliver upon the objectives and estimated returns. According to the EY-Parthenon 2022 Digital Investment Index, 71% of companies believe digital initiatives to be critical to the organization’s overall success in the next two years, particularly in enhanced customer experience, and expanded distribution and channel delivery.

Despite the need, not all investments are driving financial results. Only 28% of companies revealed a significant increase in financial returns (more than 5% ROI) in 2021 as a result of digital investment. This is, however, expected to increase in 2022 to 63%, driven by a focus on operational transformation. Interestingly, 60% of the planned investments result from canceling other internal initiatives to free up cash, suggesting trade-offs need to be made to redeploy capital.⁵

There are five retail performance improvement strategies that can help retailers capture untapped value and lay the foundation for long-term growth:

  1. Forecasting and demand sensing – Enhancing demand-planning tools with the data, functionality to integrate a greater array of demand signals, local consumer behaviors and external data sources, and artificial intelligence can provide more accurate scenario results. Inventory can be more effectively allocated within the distribution network. Implementing advanced forecasting technologies in retail could typically result in a 13%–16% reduction in store inventory, 18% reduction in out-of-stock situations and triple orders gaining momentum.⁶
  2. Real-time inventory analytics – Integrating front-end POS systems with inventory positions and replenishment functions, increasing internal and external indicators collected from across the value chain (including returns), and leveraging advanced analytics capabilities will improve agile decision-making. Incorporating predictive analytics in inventory management could result in inventory cost reduction of 25%–30% and boost sales by 11%–20%.⁷
  3. Expanding network infrastructure – Investing and partnering to expand network options and flexibility can accelerate product flow to customers, whether from the source or in the last mile. This allows for more purchase pickup options and effectively managing return flow. Given the rise in online shopping, retailers are investing in setting up micro-fulfillment centers that could lead to significant reduction in order fulfillment and real estate costs.
  4. Better supplier and vendor management – Enhancing supplier contractual arrangements will help to better align investments, whether in payment terms, discounting strategies or allowances tied to results. Retailers could leverage technology to centralize their vendor management, which could result in 25%–30% procurement cost savings on top of cash benefits.⁸
  5. Funding gap – Developing vendor strategies that incorporate the funding cost of inventory and enable flexible financing solutions will help to better balance supplier and retailer cash priorities. Funding gap metrics can be established by vendor, product family or even SKU. This will enable further breakdown of gross product return on investment to confirm that buyers are considering cash investment in purchasing decisions.

These priorities are not usually mutually exclusive, and the best performers will be those that can integrate these strategies.

Retailers may need to find the right balance when managing working capital

Leading companies can reimagine how they manage working capital. Cost and cash are not mutually exclusive, as many retailers are outperforming their peers in both metrics. Retailers also cannot fully rely on external funding to support their key initiatives. Long-term debt has increased 92% ($285b) between fiscal years 2018–21,⁹ and indications point to interest rates continuing to rise through the end of 2023 and beyond. Forty-six percent of retailers highlighted that access to capital to fund digital initiatives will be a challenge in the next two years.¹⁰ Working capital improvements can be a valuable source of self-funding for initiatives. And with a potential cash release of up to $225b across the sector, there is a lot of trapped cash that can fund transformations.

Beyond recognizing the need to improve working capital performance, proper execution is often the “Achilles’ heel” to unlock the cash benefits. For retailers that have traditionally been laser-focused on growth and margins, this may require a mindset change to take more deliberate steps to integrate a cash-focused culture into decision-making. This includes alignment across merchandising, planning and the supply chain; increased visibility to understand working capital balances and their consumption drivers; and challenging business leaders to justify above-budget investments. Applying a zero-based budgeting approach to working capital investment can help deliver above-average returns.

Uma Chidambaram of Ernst & Young LLP contributed to this article. 


Retailers have many priorities. Pursuing strategies that emphasize cash flow will likely differentiate those companies that are successful in achieving their transformation goals.

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