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Putting working capital to work

Are you optimizing your working capital management?

As economies endure multiple lockdowns, businesses need to be dynamic and ready to conserve liquidity and improve cash visibility. With the impact of COVID-19 and the related supply chain challenges, there hasn't been a better time to focus on cash and working capital (WC) management.

Q2 working capital pulse check

With companies releasing financial data for Q2 2021, Deloitte has continued to explore recent working capital trends, the impact of COVID-19, and related economic challenges on companies' ability to manage their liquidity. In our latest working capital roundup, we looked at how recent supply chain challenges, labor shortages, and uncertainty around COVID-19 variants impact cash and working capital by comparing changes from Q1 2021 to Q2 2021, as well as the changes year over year from Q2 2020 to Q2 2021.

Working Capital Roundup

Current trends

Year over year comparison between Q2 2020 and Q2 2021 shows a 7.1 day decrease in the cash conversion cycle driven by improvements in days sales outstanding (DSO) (4.9 days decrease) with companies collecting faster and DIO (8 day decrease) with companies holding less inventory partially due to supply chain challenges, and downward movement in DPO (5.8 day decline) as companies move closer to historical payment terms.

Unfortunately, compared to Q1 2021, the overall cash conversion cycle for Q2 2021 has worsened by 1.6 days with negative movement in both DSO (increasing 1.1 days when compared to Q1 2021) and days payable outstanding (DPO) (decreasing by 1.1 days when compared to Q1 2021). This was the first increase in DSO since Q2 2020 after three straight quarters of positive improvements, while DPO has been more volatile over the last year with mixed results over the last year and a half.

Managing liquidity levels through COVID-19 and beyond

The COVID-19 pandemic had a widespread impact on the financial health of businesses. Companies have had to cut costs, as operational strategies that were unquestioned for decades went through a paradigm shift. The full scope of losses incurred is yet to be measured. But we saw a significant decline in the gross domestic product (GDP) and the US economy saw record-high unemployment rates.

Due to market volatility, the road to recovery will not be smooth. As a proactive measure, companies need to be crystal clear on their levels of liquidity. Looking ahead, they must reevaluate their working capital performance to ensure they are fit for both immediate purposes and can deal with prolonged uncertainty.

Optimizing working capital performance

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

Find out how we can help

Disruption is inevitable. Now, companies can either be at its mercy or become disruptors themselves—but only the latter will thrive. With our leading-edge technologies, insights, and experience, we help clients design a robust cash governance framework and move towards becoming an outcomes-driven organization.

Learn how to valuate and improve your working capital.

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