Faster collection of customer payments in FY20 drives working capital boost and unlocks $3.6 billion in cash for top companies
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 counter-parties 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:
- Food & Beverage was the top-performing sector in terms of working capital performance, driven by a 10.3 day reduction DSO. The sector benefited from “panic buying” and a redirection of spending during the early stages of COVID-19 meaning stock was in demand, and operators could request short collection terms.
- Retail saw strong revenue growth (around 11% on average), a surprising result given the doom and gloom surrounding the sector. The sample reduced DWC by 7.4 days and was the only sector to show improvement across all working-capital metrics, including the largest reduction in inventory holdings as demand in some retail sectors soared.
- Construction & Engineering companies achieved an average reduction in DWC. However, it required careful management because whilst operators were able to collect more quickly from customers by around 14 days they also paid suppliers on average almost 12 days more quickly.
- Agriculture companies recorded the highest average increase in DWC driven by increases in DSO. The difference between the “best” and “worst” performers in the sector was in excess of 250 days. The sector also carriers the highest inventory load requiring significant management focus.
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.
McGrathNicol Advisory Partner Sean Wiles said, “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.
“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.”
To read the full report please visit: www.mcgrathnicol.com.