The state of working capital in Australia has recently shifted. After a challenging few years, early signs of recovery and stabilisation of working capital positions have been present, with companies beginning to make in-roads in stock builds, adjusting their procurement strategies and supply chain management and focusing on technology and automation to drive efficiencies through the working capital cycle. 

Our report indicates that whilst 76% of companies increased revenue in FY23 relative to FY22, only 59% increased operating profit. Further, 57% of total companies experienced a corresponding increase in net working capital, signifying additional cash being tied up in their working capital cycles in FY23. 

Many consumer product manufacturers or retailers (‘product based’ businesses) through FY21/22 saw the combined effect of stock builds to shore up supply and impacts of inflationary cost prices increase the total carrying value of inventory to record highs. In FY23, these sectors demonstrated some of the largest median improvements in total cash conversion, largely attributed to concerted efforts to improve inventory management and turnover relative to prior years.

Meanwhile, those sectors more exposed to supply constraints and supplier default risk through the prior years (such as those in Homebuilding, Hospitality/Tourism and Transportation sectors) generally showed faster payment to suppliers. Much of this cash outlay was able to be offset through improved debtor collection with the exception of Hospitality/Tourism sector where lower consumer sentiment also drove a worsening debtor performance.

The Automotive – Retail & Parts sector experienced a decline in cash conversion due to shorter payment times to suppliers, lengthening days to collect cash and turnover of inventory held. 

While FY23 saw some large swings in the median cash conversion, the spread between the lower and upper quartiles within each sector remains large and indicates there is still significant amounts of liquidity tied up in working capital across the ASX amongst sector peers.

Considering the persisting local and global market conditions of record high inflation, increasing interest rates and further economic uncertainty around consumer sentiment, a focus on best practise cash and working capital management is as important as ever.

The signalling of a possible economic slowdown with increased market volatility and funding stress, highlights the importance of prioritising efficient working capital, maximising cash from operations, to free up enough free cash flow to take dividends, pay down debt or to invest in capital or growth projects for the future.

Recommendations
 

• For CFOs and Management: a focus on cash visibility, decision tools and analytics and communication through the business on what drives cash is important. This might include regular cadence on targeted collections, end to end inventory management to balance investment in stock with availability, and appropriate and regular supplier risk review and terms management.
• For Key Investors: understanding where your investee companies have cash tied up and how well they can extract it.
• For Lenders: gaining visibility over working capital risks and confidence in current or potential working capital backed lends. This requires actively managing working capital requirements and blockages to ensure companies are managing liquidity risk pressures.
  
  

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Contributor

Anthony Cocco
Deloitte – Australia
+61 2 9322 5744
antcocco@deloitte.com.au
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