When assessing the financial performance of a businesses, it is commonplace for management teams to only think about revenue and earnings. Analysts scrutinise and rate companies on their profitability, owners link dividends to earnings, and executives, sales and operational staff are typically incentivised through bonus structures linked to either sales or earnings, or both.
However, this approach neglects one key aspect of what makes a business tick: cash flow. Sales and earnings do not mean much unless they can be converted into cash, quickly, and to do this companies need good working capital management. The shorter a business’s working capital cycle, the better its cash flow, and the more flexibility it has in making business decisions.
McGrathNicol Advisory recently explored the working capital cycle of a sample of 146 ASX listed companies across nine sectors, including the transport and distribution sector. It found that this sector experienced the greatest deterioration in working capital performance in 2018, with all but one of the sampled companies having lengthened their working capital cycles.
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