Managing working capital not only gives access to firms to the cheapest form of finance but also assists to uncover opportunities in other areas, such as operations, sales, procurement, finance and supply chain. Study of top 500 listed firms in India shows that there is an opportunity to unlock INR 1.8 trillion cash from improved working capital management. Moreover, analysis shows that firms who manage working capital well also fare well in other financial parameters like ROCE and margins.
Working Capital Management Scenario of India Inc.
Top 3 sectors with the highest C2C in FY17
Compared to other regions, there appears to be a significant scope of optimizing working capital for India Inc. by adopting efficient working capital practicess
Impact of GST on working capital performance:
Managing the complexities and extracting maximum benefits from the working capital opportunities presented by the GST regime would be a key area of focus in the short-term
The overall cash opportunity for India Inc.
India Inc. has INR1.8 trillion of cash trapped in their balance sheets
There was significant deterioration in C2C days between FY16 and FY17. This was mainly driven by an increase in DIO by 10 days, which appears to be due to the increase in underlying oil prices, thus impacting both inventory value and volume.
The metals and mining sector saw a deterioration in C2C in FY17 mainly due to an increase in the working capital of steel companies. This appears to have been driven by disruption in coke/coal imports impacting inventory values and payables.
The overall C2C reduced in FY17 across the construction and engineering sector primarily due to improvement in inventory days. While the receivables days also decreased, receivables management continues to be a significant challenge for the sector. This sector continues to be troubled by project delays, liquidity crunch and inherent inefficiencies in the system, leading to a C2C cycle of over four months.
The pharmaceuticals sector witnessed a large improvement in C2C days in FY17 as compared to FY16. While this is an improvement over FY16, the overall working capital performance is broadly in line with the average performance across FY14 and FY15. Some of the improvements in FY17 over FY16 were driven by companies engaging in factoring and bill discounting to reduce receivables.
The auto components sector experienced a marginal improvement in C2C days in FY17 mainly due to an increase in payable days, which was partially offset by an increase in inventory days. A significant increase in key input commodity prices (steel, rubber, copper etc.) along with an increase in imports impacted the payables.
The overall C2C days across the chemicals sector reduced in FY17 largely driven by a significant decrease in receivables. The fertilizers and agrochemicals and diversified chemical sectors demonstrated a reduction in DSO, which was partly driven by a reduction in outstanding subsidies.
Self Diagnostics - Find out where your company stands
Benefits of effective working capital management
Improved liquidity and credit profile
Higher return on capital
Reduction of interest expense
Improved customer service levels
Improved commercial and operational performance
Develop ‘Cash culture’ within the firm
Free up cash to fuel growth – capex, acquisitions
Positive impact on valuations
How we can help
EY’s India team of dedicated working capital professionals can help you identify, evaluate and prioritize realizable improvements to liberate significant cash tied up in working capital.
We assist organizations in their transition to a cashfocused culture and help implement the relevant metrics to prioritize focus on working capital. We also identify areas for improvement in cash flow forecasting practices and assist in implementing processes to improve forecasting and frameworks to sustain those improvements. In addition to increased levels of cash, implementation of working capital improvement initiatives results in significant economic benefits from productivity improvements, reduced transactional and operational costs, lower levels of bad and doubtful debts, and reduced inventory obsolescence.
We are the largest practice worldwide, dedicated to helping clients drive rapid and sustainable release of cash from working
- Averaging 20-25% cash flow improvements or 7-10% of Revenue
- Deep industry, functional and financial expertise
- Delivered more than $50 billion of incremental cash flow to clients
- Highly tailored approach, not “off the shelf”
- Backed by over 200,000 EY colleagues across the globe
- Senior team with 130+ years of experience
- Having worked in over 60 countries