Research released by McGrathNicol Advisory reveals that the length of the average working capital cycle shortened in 2019 for a sample of 140 ASX-listed businesses operating in nine different sectors. This translated to the equivalent of $1.3 billion in additional cash released from working capital for those sampled companies.

McGrathNicol Advisory’s 2019 Working Capital Report found that whilst there was an overall average reduction in Days Working Capital (DWC), results were mixed across sectors and within each sector. Five of the nine sectors showed a reduction and only 50% of all sampled companies reported lower net working capital.

The five sectors that achieved a decrease in net working capital were Building Products, Transport & Logistics, Construction & Engineering, Mining & Resources and Mining Services, mainly achieved by reducing the time taken to collect from customers (DSO) and reducing inventory holdings (DIO). The sector with the most material improvement was Building Products, where DWC fell by 7.9 days to 75.1 days, however that sector remained the second most working capital “intensive” due to high inventory holdings, reflecting its position in the construction supply chain. Transport & Logistics achieved the second highest reduction in DWC driven by a reduction in DSO. Both sectors passed some of the benefit of collecting more quickly on to their suppliers by also paying them more quickly (lower DPO). In fact, of the seven sectors that reduced average DSO, six of them passed on some of the benefit to suppliers.

By contrast, the Construction & Engineering sector achieved an average DWC reduction of 5.6 days despite an increase in DSO, by paying suppliers more slowly (increasing DPO).

Mining & Resources was another sector with considerable improvement in working capital performance. Average DWC fell by 5.1 days on the back of shorter average collection cycles and lower inventory. While inventory holdings typically soak up the most working capital in the mining industry, buoyant market conditions allowed 63% of the sample to reduce inventory holdings and increase the throughput of production to sales in 2019. Interestingly, the average inventory holdings for the ten largest companies in the sector (contributing 90% of combined revenue) actually increased.

McGrathNicol Advisory Partner Sean Wiles said, “The findings from our research highlight the differences in the production profile of the larger of Mining & Resources companies when compared to the smaller operators and their ability to stockpile some inventory whilst still delivering sales growth.”

The four sectors in the Report where a deterioration in net working capital metrics was observed were Agriculture, Food & Beverage Production, Healthcare Services and Retail. In all of these sectors, the average inventory holdings increased and (with the exception of Healthcare Services) average inventory balances represented more than three months of sales. In Retail, a third of the sampled companies increased their average inventory holdings by more than a week.

McGrathNicol Advisory Partner Jason Ireland said, “Over half (55%) of the Retail businesses we surveyed reported an increase in DWC in 2019, as inventory levels increased. Retail is an industry continuing to face headwinds as well as a more demanding consumer. Many businesses are still determining the right inventory holding strategy.”

Mr Ireland said McGrathNicol Advisory’s Report once again highlighted that an improvement in working capital presented as an opportunity for material competitive advantage over much of the market, with the gap between the best and worst metrics in seven of the nine sectors exceeding 100 days.

“The most significant improvements in 2019 were achieved by management teams who implemented focused working capital programs. The 50% of companies that improved cash flow through working capital management gained an advantage over the 50% that didn’t.” he said.