To mark the tenth edition of the McGrathNicol Advisory Working Capital Report, we have conducted (in conjunction with YouGov) an in-depth survey of over 300 Managing Directors, CEOs, and CFOs to understand how they manage working capital.
The survey responses are particularly insightful given the challenging macroeconomic environment and the post-COVID supply chain challenges faced by participants across most sectors. Managing working capital well is fundamental to any successful business and astute business leaders are clearly giving it the same level of focus as strategy and safety, carving out a real competitive advantage for their organisations.
Working capital and cash flow management was more difficult in 2022 and is expected to remain challenging moving forward:
- 95% of respondents noted that working capital management had become more difficult over the last two years.
- 93% of respondents had changed their approach to working capital management and 79% of these were seeing improvements from the changes made.
- Despite an apparent easing of recent challenges, 92% of respondents expect cash flows will become even more difficult to manage over the next 12 months.
- Close to half of all respondents indicated that they would delay or downsize growth / expansion plans and 36% of respondents will reduce costs or consider restructuring their operations to help manage cash flow.
- 32% of respondents noted a lack of liquidity as their biggest concern over the next 12 months.
- 46% of larger companies surveyed indicated a need for additional capital / finance over the next 12 months.
Those that focus on better practice, get results:
- 79% of respondents indicated that they had changed their approach to working capital management during the last two years and have seen an improvement. Of these, 53% cited improved visibility of key metrics, 52% noted clearer roles and responsibilities, and 55% attributed the improvement to a change in their working capital processes and / or systems.
- 93% of respondents used data analytics and dashboards to help manage working capital.
- Systems (75%), data integrity (74%) and lack of clear processes (42%) were the key challenges cited by respondents.
- 61% of respondents indicated that they spend more than a day a month managing working capital, highlighting the importance of “fit for purpose” processes and systems to drive efficiencies.
- 100% of respondents that were required to lodge Payment Times Reporting Scheme (PTRS) returns indicated that they met their obligations in 2022.
Larger, established businesses are more likely to follow “better practice”, with room for improvement identified for SMEs:
- Larger businesses were more likely to employ “better practice” tools, including working capital targets and KPIs.
- Larger businesses are twice as likely than their medium sized counterparts to spend two days or longer each month managing working capital.
- 59% of medium-sized businesses relied only on finance to manage working capital, compared to 36% of larger businesses.
- Notwithstanding the above, 82% of medium-sized businesses regularly prepared cash flow forecasts, compared to 74% of larger businesses surveyed.
Lengthening of customer terms could see a further increase in DWC over the next 12 months:
- 91% of respondents had reviewed both customer and supplier terms recently.
- 57% of respondents had agreed to longer customer terms, with 70% of larger businesses surveyed noting increased standard terms.
- Larger businesses are more likely to have operational teams review supplier terms (63% of respondents). Data shows that longer customer terms (higher DSO) are often passed on to suppliers in the form of longer payment terms (higher DPO), shifting the burden of carrying working capital along the supply chain and influencing purchasing and working capital financing decisions for management teams (particularly within SMEs).
The move from “just in time” to “just in case” inventory management may remain in the medium term:
- 52% of respondents claimed that supply chain and inventory management had become more difficult over the last two years.
- 93% of respondents had recently reviewed inventory targets, with more than half increasing the level of inventory held.
- Supply chain disruption was noted as one of the top working capital concerns across all respondents over the next 12 months.
The survey results make it clear that a systematic focus on cash and working capital results in improvement, and therefore improved cash conversion. There is an opportunity for businesses of all sizes, and particularly SMEs, to build competitive advantage through a focus on “better practice” working capital management. Those that don’t have appropriate processes risk bearing the burden of the working capital shift from those that do.
This study was conducted online between 15 September and 26 September 2022 by YouGov. The study was conducted via online survey as an ad hoc study, targeting owners, managing directors, CEOs, and CFOs in Australian businesses with 100+ employees in capital-intensive industries, including manufacturing, construction, retail, transportation, agriculture, natural resources, and engineering. The sample is comprised of 302 respondents. The findings have been weighted by business size (number of employees) and location, and the sample is representative of the approximately 4,800 Australian businesses with 100+ employees in the above industries.