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Perspectives

Creating value through working capital

Why now is a great time to unlock cash

Overall, Working Capital (WC) metrics have demonstrated strong performance in 2021, with DSO and DIO beating the pre-pandemic levels across many sectors, despite the supply chain challenges and rising prices for raw materials and labor. DPO pursued the same trend of moving closer to its pre-pandemic levels and has deteriorated gradually.

Q4 working capital pulse check

With the publishing of Q4 2021 financial data, Deloitte explored the WC trends over the last 12 months, the impact of the ongoing pandemic, related economic challenges on companies' ability to manage their liquidity. In our latest working capital roundup, we looked at how disrupted supply chains, labor shortages and rising labor costs, as well as inflation and interest rate trends, impacted companies’ cash and WC from Q3 to Q4 in 2021, as well as the year-over-year changes from Q4 2020 to Q4 2021.

Read our previous reports

Working capital roundup: Q3-2021 snapshot

Working capital roundup: Q2-2021 snapshot

Working Capital Roundup: A resilient response Q1 2020–Q1 2021

Working Capital Roundup

What is driving current working capital performance?

We noted a significant shift in WC performance in the last quarter of 2021. The Cash Conversion Cycle (CCC) measuring the combined performance of DSO, DIO, and DPO increased by 3.4 days between Q3 2021 and Q4 2021, even though DIO has been at its lowest levels in the past two years (44.2 days) and DSO was only 0.4 days from its two-year best of 37.2 days. Year over year (YoY), the CCC declined 1.9 days.

  • The main reason for the quarterly CCC deterioration was the decline in DPO by 5.7 days (9.1%) QoQ and 1.9 days YoY.
  • Quarterly DPO declined across all analyzed industries, led by ER&I with 9.8 days (15%) and LSHC with 7.1 days (11%).
  • Although Quarter over quarter (QoQ) DSO improved across all analyzed industries, we see a mixed performance across the individual sectors.
  • DIO improved between 1.1 and 2.3 days in all analyzed industries except LSHC, which grew 1.1 days.

The main driver for the improvement was DSO, which declined between 0.3 and 4.2 days across all industries, and DIO, which recorded a decline of 10.4 days and 7.8 days in ER&I and LSHC. The reductions in DIO were offset though by the decline in DPO of 4.7 and 8.6 days in these industries. And although we usually see a shorter DPO at the year end, this behavior was amplified by improved payment performance to suppliers as companies started returning to their pre-pandemic payment terms and offered more attractive payment terms in the environment of supply chain challenges.

Managing liquidity levels through COVID-19 and beyond

Despite the overall positive trend, we noted that companies in the $500 million to $1 billion revenue range suffered the biggest decline in WC performance during the pandemic and are struggling most to recover, showing further declines in DSO and DIO performance in 2021 compensated by very long DPOs. These companies should focus on immediate improvement programs to reverse the negative trend.

It’s essential that decision-makers understand the vital importance of protecting liquidity. Building a cash culture means more than highlighting cash as a metric; a cash-conscious culture needs to permeate through the entire organization, so everyone assesses every decision through the lens of liquidity.

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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