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Working capital in the face of economic uncertainty

Working Capital Insights Report 2022; ASX update and sector deep dive

In the Deloitte 2022 Working Capital Report, we provide a snapshot on the cash and working capital performance of ASX listed companies across selected industries, focusing on the individual sectors and identifying key trends across accounts receivable, payables and inventory, and underlying drivers.

Whether you are an owner, an investor or a lender - how effectively a business can monitor its cash flow and convert earnings to cash through the working capital cycle has never been more important. Australian businesses are facing into headwinds caused by the highest inflation levels seen in decades. In addition, rising interest rates are expected to only push up repayments on existing loans and working capital funding as well as creating potential deterioration in payment behaviour from customers throughout the supply chain. These factors will continue to place pressure on earnings and margins and created the perfect storm for businesses in managing their operations within previously planned cash flow forecasts and funding envelopes.

Our recent report into ASX listed businesses suggests that whilst 55% increased earnings in FY22 relative to FY21, 64% of total companies had a corresponding increase in net working capital (Inventory + Debtors – Payables), indicating more businesses increased the cash tied up in their working capital cycles in FY22.

Relative to FY19 (pre pandemic), roughly 65% of companies across the ASX ended FY22 at higher levels of net working capital than FY19 (pre pandemic). Whilst the performance differs by sector, large factors at play contributing to this increase include an increased and sustained stock build in inventory heavy businesses, a tightening of terms across key supply chains (partly as the impacts of the Payment Times Reporting Scheme compliance take effect) and a extending out of receivable terms, particularly across the Transportation and a lesser extent the Construction & Engineering sector.

For owners and CFOs, what this means is that if you don’t have a close eye on cash, you should. A constant reassessment of how your cash is being spent and instilling a cash mindset in your people will be needed.

For key investors, an understanding of where cash is tied up and how well the business can extract it will become increasingly important.

For lenders, gaining increased visibility over working capital risks and extra confidence in current or potential working capital backed lends will be critical as well as ensuring businesses manage liquidity pressures by actively managing working capital requirements and blockages.In addressing these stakeholder needs, our recommended approach to working capital management centres around:

Our Principles:

You won’t fix what you can’t see - closely monitor available cash and liquidity forecasts and be prepared to take proactive steps.  Working capital improvement is best accelerated through the use of data analytics to rapidly identify where the cash is trapped or gain deeper insights into customer behaviours, supplier payment trends or inventory holdings.

Prioritise and make practical actional plans addressing both compliance issues (customer side e.g. terms/relationships ) and process related issues (business side e.g. invoicing, collections).

Accelerate outcomes through collaboration with key internal cash stakeholders (e.g. amongst business units and divisions) and clear management and oversight to drive the change and monitor performance.

Don’t just look for the once off ‘sugar hit’ – focus on fixing underlying processes and putting in place ongoing monitoring that ensures benefits are banked and sustained for the long term allowing funds saved to be reinvested elsewhere in the business and/or to fund other activities or profit improvement measures.

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