Cash tied up, suppliers squeezed: report

McGrathNicol Advisory has launched its 2018 Working Capital Report, revealing working capital metrics worsened, on average, across a sample of 146 ASX-listed businesses, in nine sectors.
The report shows working capital cycles increased by an average of 0.5 days to 48.7 days in 2018, tying up an additional $691 million in working capital within the sampled companies. The net result of 0.5 days was driven by companies holding higher average inventory balances but attempting to offset that cash impact by taking slightly more time to pay suppliers where possible.
The report revealed transport & distribution companies experienced the greatest deterioration in working capital performance, with all but one of the sampled companies having lengthened working capital cycles.
While 75% of the sample reported EBITDA growth, increased levels of activity and improved trading performance didn’t translate to better working capital outcomes.
Longer customer collection cycles and shorter supplier payment cycles drove the increase in working capital cycles. 88% of the sample reported a structural ‘funding gap’ in 2018 (meaning companies typically paid their suppliers on shorter terms than they collected from their customers). The structural funding gap widened for 75% of the sample in 2018.
While there was an overall increase in cash tied up in working capital, four of the nine sectors achieved an improvement in average metrics. The Construction & Engineering and Telecommunications sectors performed the best, each achieving more than a four day reduction in working capital cycles, on average.
For Construction & Engineering a shortening of debtor and inventory cycles drove a stronger working capital performance. The sector generally operates in an environment where suppliers are paid much faster than payments are received from customers under what are sometimes complex contracts. Closing this structural funding gap is going to become more challenging under proposed changes to the Security of Payments Act, meaning businesses in the sector need to focus on improving their contracting billing and collections processes. The results show that on average the gap closed by 0.4 days. Downer EDI was one of the biggest improvers managing to materially reduce the average time to collect cash, closing the funding gap by 15 days.
The improvement in the telecommunications sector was driven by a mix of faster customer collections, lower inventory and longer supplier payment cycles. Telstra and Amaysim were the best performers in telecommunications, with their working capital improvements representing a net cash benefit of $919.6 million and $14.6 million respectively.
McGrathNicol Advisory Partner Jason Ireland said, “The Construction & Engineering sector benefited from stronger market conditions with 81% of companies in the sample growing both revenue and EBITDA. The majority of companies in the sample were also able to improve their working capital management unlocking more than $670 million dollars in cash.”
“However, the solid performance in Construction & Engineering went against the grain with the majority of other sectors seeing an increase in cash tied up in working capital. That’s cash Australian businesses could be using to fund their growth and deliver more value to shareholders. The figures show that even a relatively small deterioration in metrics can represent a significant lost opportunity.”
The Food and Beverage sector had the longest working capital cycle of any of the industries covered, mainly due to its large inventory holdings. Two thirds of companies in the Food and Beverage sector sample held onto inventory longer driving a 2.6 day increase in Days Working Capital across the sector
“Some companies are performing exceptionally well in determining their optimal working capital holdings then setting a course to achieve them. The findings confirm that management teams need to keep a balanced and concerted focus on all three working capital levers, inventory, debtors and creditors, in order to maximise their cash flow. The competitive advantage to be gained is clear when you consider the length of working capital cycles can vary by more than 100 days between best and worst performers within a sector,” Mr Ireland added.
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