Research released by McGrathNicol Advisory shows better working capital management at a group of Australia’s largest companies in FY20, releasing an additional $3.6 billion in cash, driven mainly by faster collections from customers.
McGrathNicol Advisory’s eighth annual Working Capital Report examined the financial performance of 126 ASX listed companies across seven working-capital intensive sectors, with a combined market capitalisation of $900 billion.
Activity levels were up for the full year, with 66% of companies reporting revenue growth in 2020. There was also a cash release from a shortening of the working capital cycle as Days Working Capital (DWC) – the time it takes to convert earnings to cash – reduced by 2.4 days relative to 2019.
Improvement in DWC during FY20 was driven mainly by faster cash collections from sales (reduced Days Sales Outstanding, or DSO) in five of the seven sectors examined. Four of these sectors passed some of the benefit on to suppliers in the form of faster payments (reduced Days Purchases Outstanding, or DPO). Inventory levels remained fairly stable.
The COVID-19 pandemic appeared to impact revenue and DWC in the second half of 2020. It showed a 3.3 day lengthening of DWC, with businesses paying suppliers on average 11.8 days more quickly compared to the first half. This suggested businesses were working hard to shore up supply and support counterparties further along the supply chain during COVID-19.
McGrathNicol Advisory Partner Jason Ireland said: “COVID-19 has accelerated changes to operating models and caused a rethink of old rules for working capital management. The 2.4 day improvement is the most significant since our first report in 2013.
“Companies had to adopt technology and shift to online models. They also moved quickly to lock in supply at the onset of the pandemic, even if it meant shortening payment terms for suppliers. The research highlights the mix of results and the potential material competitive advantage for businesses that get working capital management right.”
Sectors covered in the research were Agriculture, Building Products, Construction & Engineering, Food & Beverage, Mining & Resources, Retail and Transport & Logistics. Key sector insights include:
According to McGrathNicol’s research customer collection cycles were shorter in Australia than other international regions, with cycles in Asia 1.8 times longer, EU 1.3 times and US 1.2 times. However, Australian companies held 1.4 times more inventory on average than other regions.
As companies emerge from COVID-19, a critical challenge will be managing the significant investment in new stock required without over-stocking and unnecessarily locking up cash in working capital. It will be critical for companies to assess demand patterns, and integrate sales and purchasing more closely,” McGrathNicol Advisory Partner Sean Wiles said.
“Businesses with a high concentration of suppliers and customers are most at risk of COVID-19 disrupting their operations. Our advice is to diversify to de-risk supply chains, harness technology to drive efficiencies and focus on collaborating up and down the supply chain