New research points to more cash tied up in working capital and suppliers being squeezed, but construction and engineering bucks the trend.

McGrathNicol Advisory launched its 2018 Working Capital Report and revealed that working capital metrics worsened, on average, across a sample of 146 ASX-listed businesses, in nine sectors. But, for the construction and engineering sector, a shortening of debtor and inventory cycles have driven a stronger working capital performance.

The report revealed working capital cycles increased by an average of 0.5 days to 48.7 days in 2018, tying up an additional $691 million in working capital within the sampled companies. The net result of 0.5 days was driven by companies holding higher average inventory balances, but attempting to offset that cash impact by taking slightly more time to pay suppliers where possible.

Whilst there was an overall increase in cash tied up in working capital, four of the nine sectors achieved an improvement in average metrics. The construction and engineering and telecommunications sectors performed the best, each achieving more than a four day reduction in working capital cycles, on average.

For construction and engineering, a shortening of debtor and inventory cycles drove a stronger working capital performance. The sector generally operates in an environment where suppliers are paid much faster than payments are received from customers, under what are sometimes complex contracts. Closing this structural funding gap is going to become more challenging under proposed changes to the Security of Payments Act, meaning businesses in the sector need to focus on improving their contracting billing and collections processes. The results show that on average, the gap closed by 0.4 days. Downer EDI was one of the biggest improvers, managing to materially reduce the average time to collect cash – closing the funding gap by 15 days.

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This article was authored by Simon Gould and was first published in Inside Construction on Monday 12 November 2018.