Global businesses benefiting from good working-capital management, PwC says
BUSINESSES around the globe are brimming with more cash than at any point in the last five years thanks to the improved management of working capital, according to PricewaterhouseCoopers (PwC).
Last year witnessed the first significant improvement in global working capital since 2010 as businesses woke up to the benefits of holding cash, according to PwC’s “2015 Annual Global Working Capital Survey – Bridging the Gap”. The improvement has contributed to an 11.3-per-cent jump in the amount of money that companies have on hand.
The study analysed the books of 10,215 of the world’s largest listed companies to track their success in optimising working capital. It found that more can be done, as debt levels grow and the ability to generate new money from operations stagnates.
According to PwC’s analysis, revenue trends of the last five years suggest that 237 billion euros (Bt9.5 trillion) of additional working capital will be needed to fund operations this year. That means that more than 950 billion euros could be released from the balance sheets of global listed companies by addressing poor working-capital performance.
Even so, many companies have struggled to convert more operating profit into cash.
Cash-conversion efficiency (CCE) has improved by just 0.5 per cent over the last five years, while debt burdens have risen to a five-year high, led by Europe. Globally, net debt relative to EBITDA (earnings before interest, tax, depreciation and amortisation) has risen at a compound annual growth rate of 5.1 per cent.
Sira Intarakumthornchai, chief executive officer for PwC Thailand, said Asia lagged behind most other regions in terms of working-capital performance, and the gap was widening.
Compared with Europe and North America, Asian companies have the highest net working capital percentage (NWC) and the worst CCE at 73.8 per cent, the report showed. Their EBITDA margin was the lowest at 11.9 per cent, and working-capital performance also deteriorated the most of any region in the last five years.
This is a common trend for companies with relatively high working capital, as most of their cash needs to be reinvested in the business to enable growth.
“Bridging the gap is a priority especially for Asian, and small and medium-sized enterprises,” Sira said.
The gap between the top and bottom performers in every industry is significant.
“Companies can free up significant amounts of cash by simply managing inventories, account receivables and account payables better,” he said. “Better working-capital management will not only keep the business alive, but also unlock opportunities to improve competitive positions.”
The annual survey found that the gap between working-capital levels of large corporations and small enterprises had widened to 10.6 percentage points from 7.6 percentage points in 2010.
While large corporates have improved their working-capital performance, small enterprises have experienced a sharp deterioration. In addition, large companies were able to generate more cash from operations, partially driven by their lower working-capital funding requirements.
Small enterprises have to rely more on external debt to
close the funding gap. Combined with comparatively higher interest rates, they are placed at a competitive disadvantage.
“Compared [with] large businesses, small enterprises are less competitive due to a lower capacity to generate working capital and income from operations,” Sira said.
“Higher debt costs, less ability to generate cash from operations, and low returns on working capital are the main disadvantages of these small enterprises.”
SME entrepreneurs’ Trade and Service Sentiment Index in May fell to 39.9 from 45.2 in April, according to data from Thailand’s Office of Small and Medium Enterprises Promotion.
The Manufacturing Production Index also dropped 5 per cent to 80.2 from a year ago, while the value of exports slid 1.4 per cent to Bt169.5 billion.
“Prudent working-capital management will help SMEs at a tough economic time like this. By becoming working-capital efficient, SMEs can see improved and more reliable cash flows while boosting their productivity and reducing the risk of incurring losses or business failure.”
