McGrathNicol: Billions of working capital locked up at ASX companies

30 November 2021 4 min. read
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Working capital drives cash flow, and more cash means more flexibility in making business decisions. However, in periods of trading volatility and disruption, as has been experienced through both waves of Covid-19, the ability to manage working capital effectively is made all the more difficult.

In its recently launched Working Capital Report 2021, McGrathNicol looked to quantify the Covid-19 effect by analysing the working capital performance of 137 ASX listed companies across seven sectors.

“The businesses we looked at needed a higher working capital load to do business in 2021,” explained Sean Wiles, an Advisory partner at McGrathNicol and co-author of the report.”

Sean Wiles, Jason Ireland. McGrathNicol

“We saw a 3.1 day increase in net working capital cycles which translated to an additional $5.5 billion in cash locked up within our sampled companies,” he said.

The report showed that companies collected cash from their customers more slowly, and held more inventory.  They partly offset the impact of this by paying supplier more slowly. “Holding back payments to suppliers is not an uncommon lever for businesses, and one that’s typically in their control, but as you would expect is hard to sustain for too long,” noted Jason Ireland, also an Advisory partner at McGrathNicol and co-author of the report.

“An interesting side note to this was that in four of the sectors – agriculture, construction & engineering, mining & resources, and transport & logistics – average payment terms to suppliers were 60 days or more,” he added.

Of the sectors covered by McGrathNicol, the food & beverage sector experienced the largest deterioration in working capital performance of all sectors in 2021.  The net working capital cycle lengthened by just over two weeks, ‘locking up’ an additional $400 million in cash. “This was actually one of the biggest changes in working capital we have seen over the nine years of undertaking this analysis and writing the report,” said Wiles.

An interesting insight was that the food & beverage companies carried over a month’s more working capital than their retail customers and their transport suppliers, highlighting where the working capital burden sits in this particular supply chain.

Who’s leading the way?

McGrathNicol also looked at the ‘best’ and ‘worst’ managers of working capital and noted that there was a spread of greater than 100 days in the length of the working capital cycle in five of the seven sectors.  It was greater than 200 days in three of those sectors, being agriculture, retail and food & beverage.

“This is a key data point as it shows that there is a huge range of results at the company level and highlights that a material competitive advantage can be achieved by implementing best practice,” Ireland explained.

“Interestingly, across each of the elements of working capital, the spread got wider during the second half of the year, signalling the challenges faced by businesses as trading conditions changed after the first wave of Covid-19,” he added.

As Australia emerges from the most recent Covid-19 lockdowns, most sectors are likely to be presented with growth opportunities. How businesses manage their working capital will be a huge factor in determining whether they take advantages of those opportunities or not.

“Growth requires stock and we think stock will be difficult to secure.  We started to see the early signs of this in the second half of 2021, particularly in sectors like building products and construction & engineering where inventory loads were reduced,” Wiles explained.

“Australia is emerging from the second wave of Covid-19 later than other western economies. The demand from Europe and North America is placing strain on supply chains that had not fully recovered. They are also paying more, increasing costs across the supply chain, not just the well-publicised shipping price rises,” Ireland added.

McGrathNicol’s report also included international benchmarking data that showed that Australian businesses typically hold close to 1.5 times the inventory of their US, European, and Asian counterparts. However, with the supply chain pressures that are materialising, they may not be afforded the same luxury in 2022.

“Management teams will likely have to look at other sources for stock, including onshore and alternative suppliers. The days of having all of your eggs in one basket are gone for the time being,” Ireland said.

Wiles added, “More fundamentally, there will need to be a dedicated and disciplined focus on working capital going into the new year. It will need to be given the appropriate level of airtime with senior management and the Board, in the same way that strategy and safety are key pillars of any successful business. Management teams that establish best practice processes and track performance at all levels of the working capital cycle will win.”