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Creating value through working capital

Why now is a great time to unlock cash

Overall, Working Capital (WC) metrics have deteriorated in 2022 when compared to 2021, even though revenue and EBITDA have increased, largely based on pricing increases. As interest rates continue to rise, companies are focused on freeing trapped cash and improving working capital efficiencies.

Will lessons from 2022 lead to the creation of a cash-conscious culture?

Despite supply chain challenges, conflict in Europe, and rising raw materials and labor prices, the revenue and margin demonstrated strong performance in 2022. The year saw companies showing organizational resilience and focusing on producing higher revenue results across all sectors while benefiting from key tailwinds like the continued opening of the global economy. We noted however that companies in the $1 billion (or more) revenue range suffered the biggest decline in working capital performance last year, mainly due to a significant decline in DPO.

As we explore the findings of our annual Working Capital Roundup, it becomes clear that the sooner the decision-makers understand the importance of protecting liquidity, the better. Companies and executive teams need to be prepared to manage their working capital cycles proactively to tackle different challenges and gain a competitive advantage compared to their peers.

Download Working Capital Roundup: Cash-generation opportunities - What we learned from 2022

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What is driving current working capital performance?

  • Quarterly Cash Conversion Cycle (CCC) days deteriorated by 2.8 days YoY, between Q4 2021 to Q4 2022 and 1.3 days when compared to Q3 2022; however, it remains 0.8 days below pre-pandemic levels (Q4 2019).
  • Overall, the CCC metric has remained consistent at the end of each year over the past four years, moving between 27 and 28 days, except for Q4 2021, which ended up at 24 days due to the historically low DIO of 44.8 days and the second-best DSO of 36.8 days that year.
  • In Q4 2022, we see a typical quarterly deterioration of WC performance, as companies make their annual year-end pushes. This year the decline in DPO from 61 days in Q3 to 56 days, drove the deterioration. This resulted in CCC to increase from 25 to 27 days in the last quarter of 2022.
  • When breaking down CCC results by industry, we can see a deteriorating WC trend across almost all sectors, led by TMT with a 6.9-day increase, followed by consumer and ER&I sectors with 3.4 days and 1.1 days, respectively. The only sector that saw an improvement was LSHC with a 2.7-day CCC reduction.
  • Across all industries, the main driver for working capital deterioration was DPO, which recorded a decline between 0.8 days and 2.5 days across all industries except LSHC with 1.6-day improvement, and DIO also increased between 0.8 days and 5 days in the same industries, led by the technology sector. Increased inventory levels were, in many cases, driven by growing economic activity and increased order intake at the year end.

The next steps

The right people, processes, and systems can create a culture that improves WC performance and frees up capital. That freed-up capital can then be used to lower debt and invest in the business. And this flexibility can lead to greater returns and sustained performance in the future. Leaders must put in place proactive measures that build a cash-conscious culture, where an employee is empowered to assess every decision through a liquidity lens.

We can help you thrive

Disruption is inevitable. But companies have options. They can either be at its mercy or become disruptors themselves—but only the latter will thrive. To optimize working capital performance, companies need a tailored and structured approach. With our leading-edge technologies, insights, and experience, we help clients design a robust cash governance framework and move toward becoming an outcomes-driven organization.

Learn how to valuate and improve your working capital.

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