PwC: $5.5 trillion of cash is tied up in working capital

07 December 2021 3 min. read

The amount of cash tied up in working capital – the cash businesses need to run day-to-day operations – has increased markedly during the pandemic, as logistics, supply chain and inventory issues beset global markets, according to PwC’s latest annual Working Capital Study. A round-up of the report’s key findings in five charts.

While the total amount of cash in working capital remained stable at $5.5 trillion, the turmoil of the pandemic saw net working capital days reach a record high in 2020.

Net working capital and working capital days

There are however significant sectoral variations in net working capital days performance. Between 2019 and 2020, 10 out of 17 sectors categorised by PwC saw a deterioration in net working capital days. Four of these sectors saw a double-digit deterioration – Aerospace & Defence, Hospitality & Leisure, Automotive and Energy & Utilities – reflecting the shock suffered in these sectors during the initial stage of the pandemic.

Of the sectors experiencing a decline in net working capital days, all but one (Metals & Mining) also saw a deterioration in Return on Invested Capital (ROIC).

Change in NWC days and change in ROIC from 2019 to 2020

The movement in working capital reflects what happens when companies look to pull short-term levers. As customers delayed payments, the Days Sales Outstanding (DSO) – the length of time taken for invoices to be paid reached a five-year-high, increasing to almost eight weeks (54.1 days), up seven percent annually.

At the same time, and partially as a knock-on impact, companies stretched their creditors, with Days Payable Outstanding (DPO) also increasing by 7% to more than 10 weeks (72.2 days), breaking a four-year trend of shortening payment days. With increased uncertainty over demand and supply, the time inventory remained on shelves before being sold increased by five percent to more than eight weeks (59.5 days).

DSO, DIO and DPO trends

Commenting on the developments, Daniel Windaus, a partner at PwC, said: “The deterioration in working capital performance reflected the exceptional volatility experienced by many companies. The pandemic also exposed the slow reaction of supply chains to external shocks. Lead times and replenishment strategies are being stretched even for regional supply chains, meaning safety, stock and inventory policies need to be adapted regularly.

“The lag between the cash outflows from sourcing materials and producing inventories ready to sell, and the cash collected from sales is lengthening.”

Notably, while working capital consumed a larger portion of capital, significant government support and readily available debt have allowed many companies to sustain a strong cash position – “for now at least”, said Windaus. Cash days (represented as days of cover for operating expenses) have increased by 14 days to a five-year high.

Liquidity and financial performance trend

Windaus: “With the winding down of government support, it is important to keep a close eye on capital efficiency and liquidity. ROIC took a hit, dropping by 1.4% to its lowest level for five years.”

Looking ahead, leaders in finance, supply chain and procurement told PwC’s researchers that improving their working capital efficiency is one of their top priorities for the coming year, ahead of cost savings and diversity & inclusion.

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Windaus sees several challenges that companies will have to navigate in order to optimise their working capital chain. “There is a perfect storm of supply constraints and rapidly changing consumer demand. Companies are having to re-evaluate planning and production. Shortages of raw materials will inevitably result in stock shortages and operational disruptions in manufacturing businesses.”

“Logistics, volatility, as well as the drive to net zero, are likely to lead to an increase in nearshoring where possible, along with a heightened focus on the stability of critical external suppliers.”

For its analysis, the consulting division of PwC (a global professional services firm) analysed the working capital positions of over 20,000 companies worldwide.