Robust working capital management is crucial
The Covid-19 pandemic and recent geopolitical and economic developments have demonstrated the far-reaching risks that volatile supply chains can cause. Flows of some raw materials and end products were brought to a standstill. Production was temporarily disrupted, warehouses filled up and sales plummeted. Even if the focus of many companies is shifting from ensuring stabilisation towards recovery and growth within the new normal, cash management remains a pivotal challenge. This year's PwC Working Capital Report analyses the situation among companies in Germany, Austria and Switzerland (DACH) as well as the Benelux region and provides an outlook regarding the current trends influencing working capital.
“The Covid-19 pandemic and the current geopolitical situation have shown the importance of effective working capital management for companies. It is now a question of making the right preparations for the future. This is because conditions remain tense – not least due to increasing inflation and rising interest rates.”
Overview of the study
Lockdowns have a palpable impact on net working capital
The lockdowns implemented during the pandemic have clearly left their mark on the DACH and Benelux countries. Companies required more capital in order to overcome the challenges of the pandemic in the short term and to conduct their business. In 2020, net working capital (NWC) levels fell by 6 % compared to the prior year. However, sales fell by 9 % and the ratio of networking capital to sales as a percentage thus rose to 12.1 %, its highest level since 2016.
Disrupted supply chains are causing both shortages and full warehouses
Days inventory outstanding (DIO), i.e. the number of days inventories are held before being used, rose by 3 days in 2020 and thus stood at a five-year high. This development was particularly acute in the second quarter of 2020 when the pandemic was having immense impacts on supply chains. Warehouses filled up and DIO figures rocketed with an increase of 13 days. The duration of capital tie-up also increased abruptly during this period to 60 days. These values fell again in the subsequent quarters. In the second quarter of 2021, these values returned to pre-crisis levels with DIO amounting to 66 days and the duration of capital tie-up amounting to 50 days.
Payment behaviour deterioratinges: increase in DSO and DPO figures
The number of days between the issuance of an invoice and receipt of payment (days sales outstanding – DSO) rose by 2 % in 2020. The number of days between the receipt of an invoice and settlement of payment (days payables outstanding – DPO) climbed to 58 and was thus eight days higher than in 2019. Nevertheless, the exceptional situation during the second quarter of 2020 is clearly observable here as well. The DSO and DPO values rose by more than 10 % during this period. In the first quarter of 2021, the DSO and DPO figures returned to levels similar to those before the pandemic.
Downturns in working capital across all sectors
During the pandemic, sudden fluctuations in supply and demand resulted in longer delivery times and intervals – including within regional supply chains. Reserve inventories and warehousing strategies had to be adjusted. The challenges faced here varied greatly across sectors and locations – as did working capital performance and the resilience of supply chains. For example, the figure for NWC days in the aerospace, defence and security sector stood at 196. By contrast, the corresponding figures in the engineering and construction industry as well as in the retail sector stood at 12 days and 7 days respectively.
Data analytics and process mining allow for greater transparency
The pandemic and its effects have caused major fluctuations in demand and have thus made most CSOs focus more on working capital management. Many companies initially focused simply on “cash wins” – especially within the context of order-to-cash, procure-to-pay and forecast-to-fulfill processes. With this approach, however, it was usually only possible to identify at most 40 % of a company’s cash potential. With the assistance of data analyses and process mining, it is possible to identify further potentials with artificial intelligence analysing the ERP transaction data, detecting relationships and thus drawing up recommendations for action. Using this approach, every order process, every invoice and every delivery is reviewed automatically. In order to do this, however, processes have to be adjusted and the data must be compiled.
ESG criteria becoming more important for working capital management
In an increasingly networked world, companies bear responsibility for more than just sustainable practices within their own premises. Practices along the supply chain are garnering greater attention with a view to environmental social and governance (ESG) topics. Working capital management therefore also has to take sustainability aspects into consideration. This includes, for example, controls of suppliers and gaining an understanding of their sustainability record as well as initiatives for promoting sustainable supply chains based on specific goals, such as reductions in greenhouse gasses.
Current trends influencing working capital management
- COVID-19
- Supply chain resilience
- Digitalisation
- Regulations and compliance
COVID-19
Even if the sudden shock is now behind us, the pandemic is still casting a long shadow. Many companies have adjusted their supplier base and now rely on multi-sourcing strategies in the area of procurement. In addition to the increasing regionalisation and near-shoring of supply chains, there is also an observable convergence of business models and a growing number of collaborative efforts throughout the value chain. Moreover, priorities have changed with regard to distribution channels and new sales strategies have gained traction.
Supply chain resilience
Against the backdrop of globalisation, the resilience of supply chains becomes even more important in times of crisis. Companies must ensure that both they and the organizations along their supply chains have sufficient capital to withstand times of crisis and to be equipped for the future. In order to achieve this objective, companies must carefully weigh up the trade-offs between costs, liquidity, speed and resilience.
Digitalisation
Digital technologies are the key to ensuring comprehensive transparency in relation to liquidity. Regardless of the respective situation in various sectors, data analyses enabled companies to identify weaknesses along their supply chains immediately. They were thus able to respond swiftly and coordinate actions with their most important suppliers. Digital tools such as advanced data analyses and process mining help in overcoming the complexity and fragmented nature of end-to-end operational processes.
Regulations and compliance
Against the backdrop of recent geopolitical and economic developments, international trade has become more complex for companies in the DACH and Benelux countries. A number of EU directives and national regulations are directly influencing working capital management. This includes guidelines on payment deadlines for suppliers, the German Act on Corporate Due Diligence in Supply Chains (Lieferkettensorgfaltspflichtengesetz – LkSG) and the Unfair Trading Practices (UTP) Directive. Compliance requirements concerning environmental social and governance topics are also exerting influence.
“Technologies such as data analytics and process mining create a completely new level of transparency and thus make it possible to free up additional cash.”
Methodology
The study provides an overview of the 2,386 most important German, Austrian, Swiss, Dutch, Belgian and Luxembourgian companies according to PwC’s analysis and categorised according to sector. All calculations are based on publicly accessible data. Categorisation into sub -sectors is based on the CapitalIQ Primary Industry classifications (data available for 100 % of the sample). Royal Dutch Shell and Anheuser-Busch InBev have been excluded from the data pool due to their size.
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