Working Capital Study 24/25

With policy rates now expected to normalise at high levels for the next three years across the US, UK and EU, the efficient use of available cash will remain key, especially as economic growth rates remain uncertain. Cash enables flexibility, and working capital efficiency enables cash; institutionalising WCM remains an imperative to protect against uncertainty.

Policy rates and forward curves for the US, euro area and UK

^{Source: BoE Monetary Policy Report - August 2024
Note: All data as of 22 July 2024. The May curves are estimated based on the 15 UK working days to 29 April 2024. The August curves are estimated using the 15 working days to 22 July 2024. Federal funds rate is the upper bound of the announced target range. ECB deposit rate is based on the date from which changes in policy rates are effective. The final data points shown are forward rates for September 2027}

But with capital still tied-up on the balance sheet and many customers and suppliers locked in a zero-sum cash squeeze, WCM is at risk of stagnation. This requires fresh solutions. At its core, those who succeed will be those who act now rather than react to working capital pressures. Often this involves building a more collaborative and mutually beneficial relationship with clients and suppliers to achieve those win-win scenarios, and breaking down internal organisational silos to maximise cash and value creation. Cutting across these ‘here to stay’ working capital imperatives is the need to instil the right WCM culture, skills and technology, both specialised in areas such as credit control and collections and throughout the enterprise as WCM moves up the business agenda.

Drawing on our analysis of working capital trends in over 19,000 listed companies worldwide, there is a further €1.56 trillion of excess working capital globally that could be freed up for investment in operational transformation and business model reinvention. We look at how businesses can unlock their share of this dividend.

The threat of stagnation

Working capital is a crucial part of every business’s ability to brace for uncertainty, not just in strengthening liquidity and resilience, but also releasing the funds that would allow you to transform how you create, deliver and realise value.

From a working capital perspective, many key metrics have stabilised in the last year. But after such a long period of fluctuation, there is a limited window of opportunity to act before stagnation sets in and improvements stall. Businesses that stand still will end up going backwards.

Recent trends underline this. Key measures such as net working capital (NWC) days, the level of net operating working capital held by businesses relative to their sales, have started to show marginal increases globally. Diving deeper, a mixed picture emerges, with significant differences in performance between larger and smaller corporations, hinting at missed opportunities.

Understanding which levers can be pulled to improve WCM will help companies to capitalise on this period of stabilisation and protect for the future. The starting point is drilling down into business operations to gain a better understanding of working capital drivers and their impact.

Sector 1 Year Change in DPO vs Assets days

^{Source: PwC working capital analysis of over 19,000 companies worldwide}

Disparity in payment terms

Although there has been minimal movement in days payable outstanding (DPO) this year following a period of significant fluctuation, there continues to be a big gulf still between larger and smaller corporations. While DPO in large companies is stabilising at a higher position than pre-COVID, smaller counterparts are seeing a steady decline since a peak in 2021.

Some of this disparity could soon be redressed by the introduction of regulations, with the EU leading the way, aimed at limiting the influence of large corporations in setting payment terms. This represents a significant escalation in the EU’s approach to the issue.

The impact of these proposed EU regulations in combating overdue payment in commercial transactions is expected to reduce DPO. Crucially, it could also put pressure on businesses to improve the other aspects of their cash flow, putting receivables and inventory in the spotlight. To successfully navigate and capitalise on these complex regulation changes, businesses will need to be proactive and place working capital front and centre.

Interestingly, despite the proposed EU regulations, DPO has risen by 1.5 days this year in the EU following a significant drop in 2022. It remains firmly above the proposed maximum terms. This suggests that there is a significant change coming.

Five-year DPO trend - EU

^{Source: PwC working capital analysis of over 19,000 companies worldwide}

Increasing pressure on DSO

Days sales outstanding (DSO) is a key driver of NWC days by measuring how quickly payments are received. Shorter payment terms can lead to more predictable business planning and improved liquidity. Changes in overdue receivable tends to be the early warning signs of a potential change in market sentiment. During the financial crisis and the Coronavirus pandemic, it is payment morale that showed cash challenges first.

DSO has increased by 6.6% over the past five years, and is the main reason for the rise in NWC days. This rise is attributable to a combination of lax processes and largely transactional approach to accounts receivable, which is leaving a lot of cash on the table.

With the advent of payment term regulations, there will be a pressing need to tighten up processes and boost receivables. The real winners will be companies that use the regulations as a cue for optimising their collections processes and utilise intelligent automation to predict behaviours early.

Five-year DSO trend

^{Source: PwC working capital analysis of over 19,000 companies worldwide}

The asset intensive drag

With higher interest rates impacting borrowing costs and availability of capital, certain sectors will be more acutely aware of the impact that working capital can have on a business, and also have more to gain from better WCM. An analysis of the more cash-intensive sectors (above the average of 44.1 NWC days) reveals there has been a rise of 9.1 days in NWC for these 8 sectors since 2019.

Whilst the majority of these sectors have seen significant increases in DSO over the last 5 years consistent with global trends, there has also been a deterioration to days inventory outstanding (DIO) in 6 of 8 sectors since 2019, resulting in a 2 day rise. Despite signs of a reversal to DIO in the last year, a significant amount of cash remains tied-up in inventory.

From ‘just in’ case to ‘just because’

This suggests that the ‘just in case’ stocking approach born from the pandemic has not reversed but rather evolved to a ‘just because’ ethos, placing greater constraints on working capital. The result is not just slow-moving and possibly obsolete stock, but also a drain on investment and return. This highlights the need for a more controlled and quantified approach to managing DIO and raising awareness of the impact which decisions made across the organisation can have on financial performance.

Liquidity shock-absorber

Looking beyond key WCM metrics, cash days – the measure of how long a business can cover its operating expenses – remain above the levels held pre-COVID, and while this has been reducing, the decline has slowed over the past two years. This indicates that most companies are now placing greater importance on resilience by maintaining the cash reserves to survive minor shocks and interruptions.

Five-year liquidity and resilience trends

^{Source: PwC working capital analysis of over 19,000 companies worldwide}

However, many of the traditionally capital-intensive industries such as manufacturing, aerospace and energy have seen a reduction in cash days since 2020. This reflects a conflict between the desire to earn a return on cash to counteract inflation, and the need to maintain liquidity, both lender-imposed and to mitigate cash flow volatility.

In contrast to this trend, net debt levels have increased relative to EBITDA following two years of reduction, but still remain firmly below the 2x marker. This is in line with increases in Capex and operational cash flow relative to revenue, suggesting the drive to increase profitability is becoming increasingly harder.

Avoid the plateau

Working capital remains critical and it is vital to ensure focus does not waver. Interest rates at higher normalised levels have added further impetus to the need to optimise working capital. At stake is the opportunity to free up funds, reduce the cost of capital and make investment go further in periods of uncertainty.

Our research indicates that while working capital has stabilised, most businesses are finding it difficult to push on further and realise the full potential of working capital optimisation.

So how can your business overcome the stumbling blocks and seize your share of the €1.56 trillion dividend? See below for the five priorities that stand out:

How we can help

PwC’s operational and specialist Working Capital team supports company management to realise cash improvements at pace, improve operational processes, deploy supporting technology, and drive organisational transformation.

• Data analytics and insights
• Working capital operating model design
• Cash culture implementation and training
• Operational process improvements
• Commercial negotiation and terms optimisation
• Select and integrate enabling technologies
• Cash forecasting process and reporting
• Short term cash sprints
• Provide surge capacity and managed service