2015 Annual Global Working Capital Survey - PwC · 2015 Annual UK Working Capital Survey 3 Working...
Transcript of 2015 Annual Global Working Capital Survey - PwC · 2015 Annual UK Working Capital Survey 3 Working...
Bridging the Gap2015 Annual UK Working Capital Survey
pwc.com/workingcapitalsurvey
2 Bridging the Gap
Contents
Executive summary
What is driving working capital?
1. Industry analysis
2. Geography analysis
3. Size analysis
4. Financial performance analysis
How we can support you
Contacts
3 8 11 17 23 27 32 42
Appendices
34
32015 Annual UK Working Capital Survey
Working capitalhas improvedfor the firsttime inthree years
UK companies' working capital daysare at a three year best
28.1 days
There is a
wide gap between top and bottom performersacross all sectors
12 out of 16 sectors managed to improve working capital since 2010
have the highestworking capitalratio of all theUK regions
Small enterprises have a significantly
higher NWC %than large corporations
Companies that are top performers in working capital, are also better at
could be released from balancesheets by improving workingcapital performance
12/16
generating cash
The West& Wales
GBP 24.2bn
-8.5%Cash conversion efficiency
has increased by 11% inthe last year
11%
4 Bridging the Gap
Working capital of UK companies is at its best performance level for three years
2010 2011 2012 2013 2014
-14.4%
6.6% 7.1%
-8.5%
Days working capital
31.426.8 28.6 30.7 28.1
NWC days
Delta days %
2010 2011 2012 2013 2014
2014 has broken the trend, with UK companies achieving a significant improvement in working capital for the first time in three years. Cash is clearly back on the management agenda. This improvement in working capital has also helped UK companies improve their overall ability to generate cash. As a result cash conversion efficiency (CCE) has increased by 11%.
However, these improvements do not mean that UK companies can rest on their laurels. Our study has shown that there are significant performance gaps across the UK regions and industries. Addressing these gaps will enable UK companies to more than service future cash requirement through efficiency gains. Working capital is the lifeblood to managing this liquidity flow and in the immediate aftermath of the financial crisis, many companies re-focussed their attention towards improving cash controls. The resulting improvement in net working capital for UK companies in 2011 was, however, short-lived and consecutive years of deterioration followed.
By improving net working capital days by 8.5%, our 2015 survey has highlighted a clear reversal in this trend with companies delivering the best performance levels in three years.
52015 Annual UK Working Capital Survey
Execu
tive su
mm
ary
Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
icesThe year-on-year movement was primarily driven by a strong improvement in inventory, as well as trade receivables
Days sales outstanding
Days inventory outstanding
Days payables outstanding
2010 2011 2012 2013 2014
2010 2011 2012 2013 2014
39.238.0
38.6
53.855.4
63.7
53.2
41.141.139.740.1
6.2%
1.1%
3.2%
2010 2011 2012 2013 2014
38.4
42.9
40.3
53.2
2010 2011 2012 2013 2014
2010 2011 2012 2013 2014
39.238.0
38.6
53.855.4
63.7
53.2
41.141.139.740.1
6.2%
1.1%
3.2%
2010 2011 2012 2013 2014
38.4
42.9
40.3
53.2
2010 2011 2012 2013 2014
2010 2011 2012 2013 2014
39.238.0
38.6
53.855.4
63.7
53.2
41.141.139.740.1
6.2%
1.1%
3.2%
2010 2011 2012 2013 2014
38.4
42.9
40.3
53.2
UK companies delivered the strongest receivables performance, measured in days sales outstanding (DSO), in five years with a 3.2% improvement to 38.0 days in 2014. It remains to be seen if this reduction has been driven by improved customer payment terms or by more effective collection strategies, or a combination of both. Many companies still consider the ‘receivables’ process as starting once an invoice falls due, however it is clear that the top performers focus their energy across the entire order-to-cash cycle, from customer take-on and contract negotiation (including payment terms and special billing arrangements) to billing timing and accuracy, to proactive customer contact and cross functional dispute resolution and root cause eradication.
Inventory performance, measured in days inventories on-hand (DIO), has shown the largest year-on-year improvement across the three levers of working capital. Whilst many corporates have traditionally focussed on supply chain cost efficiencies, with a reduction of 2.5 days (6.2%) in DIO in 2014, UK companies appear to have clearly actioned inventory
reduction opportunities. The more stable and predictable levels of growth seen in the UK over the last three years also impacted the DIO performance. Less variability of demand has enabled companies to more closely plan inventories to meet demand.
In 2011 UK companies adopted a short term cash preservation strategy whereby their days payables outstanding (DPO) increased by more than 10 days to 63.7. Such stretching of payments places pressure across the supply chain if maintained over a sustained period and the following three years have shown a return to 2010 levels. With 2014 DPO days showing a 3rd successive year of reduction (-1.1%), Trade payables is the only areas of operating working capital that is showing a steady negative trend.
6 Bridging the Gap
The relative working capital improvements have contributed to increased ability to generate cash
Outperforming their European counterparts, UK companies have delivered a significant improvement in their ability to convert EBITDA into operating cash flow (measured by cash conversion efficiency ratio), which increased by 8 percentage points (pp) over the last year (74.4% to 82.5%).
While cash levels are currently high both on company balance sheets and in the market place, there is still a significant requirement for funds to support anticipated future growth. Over the last three years the growth rate has been 1.3% per annum (compound annual growth rate). At a minimum, if such growth rates are sustained and the same level of working capital maintained, we estimate that UK companies will need a further GBP 5.8 billion of working capital to fund their operations in 2015.
2010 2011 2012 2013 2014
72.3%
80.7%
76.3%74.4%
82.5%
Cash conversion efficiency (CCE)
72015 Annual UK Working Capital Survey
Execu
tive su
mm
ary
Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
icesWhile growth remains relatively modest, the need for additional cash remains key
Revenue
Net working capital
GBP 5.8bn
2010
2011
2012
2013
2014
GBP trillion
GBP billion
1.31
1.44
1.44
1.46
1.47
2014
2015 119.0
113.2
2012-2014
CAGR: 1.3%
2010–2014 Compound annual growth rate (CAGR): 3.1%
GBP 5.8bn
2010
2011
2012
2013
2014
GBP trillion
GBP billion
1.31
1.44
1.44
1.46
1.47
2014
2015 119.0
113.2
2012-2014
CAGR: 1.3%
2010–2014 Compound annual growth rate (CAGR): 3.1%
8 Bridging the Gap
What is driving working capital?
92015 Annual UK Working Capital Survey
There are four factors impacting a company’s working capital requirements and relative performance
Industry
Geo
grap
hy
Fina
ncia
l perfo
rma
nce
Size
1The type of business
2 The economic maturityof the region
4 Whether managementcares about cash
3 The companysize
Execu
tive su
mm
ary
Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
10 Bridging the Gap
112015 Annual UK Working Capital Survey
Industry analysis
There is a
wide gap between top and bottom performersacross all sectors
Metals top the tablewith a 4.0%improvementin NWC % inthe last five years
12 out of 16 sectors improvedworking capital performance
12/16
-4.0%
Ind
ust
ry
Geography
Financial performance
Siz
e
Execu
tive su
mm
ary
Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
12 Bridging the Gap
NWC Days
Automotive
22
Communications
7
Transportation& logistics
11
Retail & consumer
21
Pharmaceuticals & life sciences
79
Aerospace, defence & security
46
Forest, paper & packaging
34
Healthcare
28
Industrial manufacturing
52
Hospitality& leisure
(4)
Chemicals
67
Metals
62
Technology
55
Entertainment & media
47
Energy, utilities & mining
32
Engineering& construction
59
While working capital consumption is dependent on each industry…
… all sectors show a significant spread in performance between top and bottom performers
NWC Days
“Pharmaceuticals”, “Chemicals”, and “Metals” have the highest median working capital days
20
0
40
60
80
100
180
120
160
140
66
119
Pharmaceuticals & life sciences
28
75
Metals
31
81
Industrial manufacturing
59
81
Chemicals
16
108
Healthcare
(2)
54
Retail & consumer
42
4
Automotive
16
80
Aerospace, defence & security
28
63
Entertainment & media
22
(1)
Transportation& logistics
(16)
22
Communications
11
55
Energy, utilities & mining
56
Forest, paper & packaging
14
(16)
4
Hospitality & Leisure
77
Technology
2623
80
Engineering& construction
Top performers (top quartile)
Bottom performers (bottom quartile)
132015 Annual UK Working Capital Survey
“Technology” is the sector with the longest median DSO
“Pharma & life science” is the sector with the longest medians DIO
“Transportation & logistics” is the sector with the shortest DPO
DSO
DIO
DPO
Top performers
Median
Bottom performers
Top performers
Median
Bottom performers
Top performers
Median
Bottom performers
100
0
80
60
40
20
160
0
60
40
20
80
140
120
100
160
0
100
60
40
20
120
80
55
82
36
130
149
58
125
67
53
Pharmaceuticals & life sciences
51
68
30
81
145
59
23
45
15
Metals
64
84
44
34
80
6
61
75
36
Engineering& construction
45
68
28
23
89
1
61
72
49
Industrial manufacturing
48
67
29
84
103
48
51
61
43
Chemicals
43
62
28
19
98
8
41
82
31
Healthcare
54
76
35
54
93
22
23
38
3
Retail & consumer
45
24
51
48
71
6
50
67
24
Aerospace, defence & security
50
96
23
28
-
60
84
47
Entertainment & media
35
50
22
3
2
10
28
42
21
Transportation& logistics
36
96
18
15
53
2
47
66
24
Energy, utilities & mining
68
144
59
65
81
27
60
71
41
Forest, paper & packaging
60
110
36
40
85
-
64
74
40
Technology
36
51
27
7
23
4
11
16
3
Hospitality & Leisure
Communications
98
125
61
6
3
15
38
55
31
140
6
75
38
84
71
77
64
18
6
Automotive
9
100
0
80
60
40
20
160
0
60
40
20
80
140
120
100
160
0
100
60
40
20
120
80
55
82
36
130
149
58
125
67
53
Pharmaceuticals & life sciences
51
68
30
81
145
59
23
45
15
Metals
64
84
44
34
80
6
61
75
36
Engineering& construction
45
68
28
23
89
1
61
72
49
Industrial manufacturing
48
67
29
84
103
48
51
61
43
Chemicals
43
62
28
19
98
8
41
82
31
Healthcare
54
76
35
54
93
22
23
38
3
Retail & consumer
45
24
51
48
71
6
50
67
24
Aerospace, defence & security
50
96
23
28
-
60
84
47
Entertainment & media
35
50
22
3
2
10
28
42
21
Transportation& logistics
36
96
18
15
53
2
47
66
24
Energy, utilities & mining
68
144
59
65
81
27
60
71
41
Forest, paper & packaging
60
110
36
40
85
-
64
74
40
Technology
36
51
27
7
23
4
11
16
3
Hospitality & Leisure
Communications
98
125
61
6
3
15
38
55
31
140
6
75
38
84
71
77
64
18
6
Automotive
9
100
0
80
60
40
20
160
0
60
40
20
80
140
120
100
160
0
100
60
40
20
120
80
55
82
36
130
149
58
125
67
53
Pharmaceuticals & life sciences
51
68
30
81
145
59
23
45
15
Metals
64
84
44
34
80
6
61
75
36
Engineering& construction
45
68
28
23
89
1
61
72
49
Industrial manufacturing
48
67
29
84
103
48
51
61
43
Chemicals
43
62
28
19
98
8
41
82
31
Healthcare
54
76
35
54
93
22
23
38
3
Retail & consumer
45
24
51
48
71
6
50
67
24
Aerospace, defence & security
50
96
23
28
-
60
84
47
Entertainment & media
35
50
22
3
2
10
28
42
21
Transportation& logistics
36
96
18
15
53
2
47
66
24
Energy, utilities & mining
68
144
59
65
81
27
60
71
41
Forest, paper & packaging
60
110
36
40
85
-
64
74
40
Technology
36
51
27
7
23
4
11
16
3
Hospitality & Leisure
Communications
98
125
61
6
3
15
38
55
31
140
6
75
38
84
71
77
64
18
6
Automotive
9
xx
xx
xx
Execu
tive su
mm
ary
Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
14 Bridging the Gap
152015 Annual UK Working Capital Survey
12 out of 16 sectors managed to improve working capital since 2010
Working capital improvement 2010‑2014 percentage points
Segmenting UK companies into 16 sectors demonstrates that the majority (75%) of sectors have shown improvements in working capital across the last five years.
Non‑improversImprovers
Healthcare
‑3.7%
Metals
‑4.0%
Industrial manufacturing
‑1.0%
Automotive
‑1.2%
Pharmaceuticals & life sciences
‑0.8%
Transportation & logistics
‑0.2%
Retail & consumer
‑0.3%
Energy, utilities & mining
‑1.2%
Technology
‑1.2%
Communications
‑1.8%
Forest, paper & packaging
‑3.5%Aerospace &
defence
1.1% 1.3%Entertainment &
mediaChemicals
2.2%Engineering & construction
2.6%Hospitality & Leisure
‑0.7%
The big winners in terms of working capital performance are companies within the “Metals”, “Healthcare” and “Forest, paper & packaging” sectors.
Of the four sectors that have seen a deterioration in working capital performance, those in the “Engineering & construction” sector have shown the most significant pressure with cash tied up in capital intensive programmes.
16 Bridging the Gap
17
Geo
gra
ph
y
Size
Industry
Fina
nci
al
per
form
an
ce
2015 Annual UK Working Capital Survey
Geography analysis
... however,
the North West& North Easthave the lowest ability to convertEBITDA into cash
Scotlandhas seen thesharpestdeteriorationin NWC % inthe last five years
60%
have the highestworking capitalratio of all theUK regions
The West& Wales
Execu
tive su
mm
ary
Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
18 Bridging the Gap
The West & Wales show a significantly higher NWC% than other regions across the UK
NWC % EBITDA Margin CCE
68.4%9.6% 12.6%
North East
85.4%14.9%7.2%
Midlands
63.1%15.3%10.8%
North West
89.2%20.6%9.0%
NI & Isle of Man
85.9%10.3%8.0%
Scotland
80.3%14.8%14.2%
West & Wales
83.1%17.3%7.3%
London & South East
Working capital performance varies greatly across the UK regions:
• Companies in the West & Wales region have a NWC of 14.2% which is significantly higher than the rest of the UK. In addition, the West & Wales companies have an EBITDA margin of 14.8% which is about 25% lower than the best performer NI & Isle of Man. Equally, 9pp less in CCE.
• On the contrary, companies in the Midlands have the lowest NWC % (7.2%)
192015 Annual UK Working Capital Survey
Whilst Scottish companies have seen their net working capital performance deteriorate by 60%, companies in London and South East have managed to improve by 15%
Execu
tive su
mm
ary
Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
London & South East
‑15%
Midlands
‑6%
North West
32%
Change in NWC % between 2010 and 2014
North East
‑1%
West & Wales
0%
Scotland
60%
NI & Isle of Man
37%
The deterioration of working capital performance in Scotland is driven mainly by the “Utility” sector. Although overall working capital ratio remains low, it has shown a significant jump in percentage terms in 2014.
Strong improvements in London and the South East were driven primarily by the “Healthcare”, “Packaging”, “Metals” and “Technology” sectors.
20
212015 Annual UK Working Capital Survey
Only London, South East and the Midlands have improved DSO in the last five years...
DSO Trend
... and only London, South East and Scotland have improved their DIO
DIO Trend
However, most of the regions except London and South East have improved their DPO
DPO Trend
London & South East
26
25 25
26
23
37 38
45 44
48
38 37
44
47
41
4240
39
4846
41
39
40 4040
2010 2011 2012 2013 2014
41
44
3938
40
36
34
36
35
33
40 40 41
37
41
55 55
57
5958
4447
575454
3 3 3 33
14
13
14
1212
4342
44 44
46
2010 2011 2012 2013 2014
55
5253
5656
2011 2012 2013 2014
22
27
30
26
31
28
2524
29
24
44
40
36 3533
56
5961 61
68
42
39
43
45
42
68
70
73 73
69
54
67
575455
2010
Midlands
26
25 25
26
23
37 38
45 44
48
38 37
44
47
41
4240
39
4846
41
39
40 4040
2010 2011 2012 2013 2014
41
44
3938
40
36
34
36
35
33
40 40 41
37
41
55 55
57
5958
4447
575454
3 3 3 33
14
13
14
1212
4342
44 44
46
2010 2011 2012 2013 2014
55
5253
5656
2011 2012 2013 2014
22
27
30
26
31
28
2524
29
24
44
40
36 3533
56
5961 61
68
42
39
43
45
42
68
70
73 73
69
54
67
575455
2010
North East26
25 25
26
23
37 38
45 44
48
38 37
44
47
41
4240
39
4846
41
39
40 4040
2010 2011 2012 2013 2014
41
44
3938
40
36
34
36
35
33
40 40 41
37
41
55 55
57
5958
4447
575454
3 3 3 33
14
13
14
1212
4342
44 44
46
2010 2011 2012 2013 2014
55
5253
5656
2011 2012 2013 2014
22
27
30
26
31
28
2524
29
24
44
40
36 3533
56
5961 61
68
42
39
43
45
42
68
70
73 73
69
54
67
575455
2010
North West
26
25 25
26
23
37 38
45 44
48
38 37
44
47
41
4240
39
4846
41
39
40 4040
2010 2011 2012 2013 2014
41
44
3938
40
36
34
36
35
33
40 40 41
37
41
55 55
57
5958
4447
575454
3 3 3 33
14
13
14
1212
4342
44 44
46
2010 2011 2012 2013 2014
55
5253
5656
2011 2012 2013 2014
22
27
30
26
31
28
2524
29
24
44
40
36 3533
56
5961 61
68
42
39
43
45
42
68
70
73 73
69
54
67
575455
2010
NI & Isle of Man
26
25 25
26
23
37 38
45 44
48
38 37
44
47
41
4240
39
4846
41
39
40 4040
2010 2011 2012 2013 2014
41
44
3938
40
36
34
36
35
33
40 40 41
37
41
55 55
57
5958
4447
575454
3 3 3 33
14
13
14
1212
4342
44 44
46
2010 2011 2012 2013 2014
55
5253
5656
2011 2012 2013 2014
22
27
30
26
31
28
2524
29
24
44
40
36 3533
56
5961 61
68
42
39
43
45
42
68
70
73 73
69
54
67
575455
2010
Scotland
26
25 25
26
23
37 38
45 44
48
38 37
44
47
41
4240
39
4846
41
39
40 4040
2010 2011 2012 2013 2014
41
44
3938
40
36
34
36
35
33
40 40 41
37
41
55 55
57
5958
4447
575454
3 3 3 33
14
13
14
1212
4342
44 44
46
2010 2011 2012 2013 2014
55
5253
5656
2011 2012 2013 2014
22
27
30
26
31
28
2524
29
24
44
40
36 3533
56
5961 61
68
42
39
43
45
42
68
70
73 73
69
54
67
575455
2010
West & Wales
26
25 25
26
23
37 38
45 44
48
38 37
44
47
41
4240
39
4846
41
39
40 4040
2010 2011 2012 2013 2014
41
44
3938
40
36
34
36
35
33
40 40 41
37
41
55 55
57
5958
4447
575454
3 3 3 33
14
13
14
1212
4342
44 44
46
2010 2011 2012 2013 2014
55
5253
5656
2011 2012 2013 2014
22
27
30
26
31
28
2524
29
24
44
40
36 3533
56
5961 61
68
42
39
43
45
42
68
70
73 73
69
54
67
575455
2010
22 Bridging the Gap
232015 Annual UK Working Capital Survey
Size analysis
Size
Financial performance
Geography
Ind
ust
ry
However, there is no evidence that
... and also have significantly higher
than large corporations
large corporationsstretch their creditorsmore than SMEs do
SMEs have
higher NWC %
DSO and DIO
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an
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4. Financial perform
ance analysis
How
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24 Bridging the Gap
Small enterprises have significantly higher NWC% than large corporations but have closed the gap on mid-sized enterprises across the last five years
12.3%12.2%
12.8%
13.5%
13.0%
11.8%12.1%
12.6% 12.5%12.3%
Large corporations
Revenues >= GBP 1,000m
2010 2011 2012 2013 2014
8.0%
7.4%
6.9%
8.3%
7.3%
SME’s have significantly higher DSO and DIO days than large corporations, driving a 5.0 pp differential in NWC% between the two groupings. Whilst both SMEs and large corporations have delivered consistent improvements across the last five years, it is in mid-sized enterprises where working capital pressures have been felt most, with an increase of 4.3 pp across this period.
5.2 percentage
points5.0
percentage points
Small enterprisesRevenues < GBP 500m
Mid‑sized enterprises
Revenues between GBP 500m and GBP 1,000m
252015 Annual UK Working Capital Survey
Small enterprises face challenges across the receivables and inventory elements of the working capital cycle compared to mid-sized enterprises and large corporations
DSO DSO DSODIO DIO DIODPO DPO DPO
Small enterprises Mid‑sized enterprises Large corporations
47
67
52 5348
38
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2. G
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alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
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ppend
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53
37
52
Small enterprises have higher DSO than large corporations which is likely to be driven by a combination of longer payment terms being granted (to secure business) as well as less effective order-to-cash management. Equally, small and medium sized enterprises also show high DIO. While this may be partly driven by the related mix of industry sectors, our analysis indicates that large corporates are generally more efficient in servicing demand at lower levels of stock holding.
Whilst small enterprises demonstrate the highest DPO, it is likely that this is a direct result of non collaborative payment stretch or a lack of process control. Such cash conservation strategies can have a negative cash impact in the medium to long term as suppliers withhold deliveries (or require cash on delivery) and credit insurers reassess coverage.
Contrary to popular belief, large corporations have lower DPO than small enterprises. Whilst there have been a few well publicised cases of apparent payment term pressure being placed on small enterprises, our survey does not support the fact that this practice is endemic across UK large corporates.
26 Bridging the Gap
272015 Annual UK Working Capital Survey
Financial performance analysis
Finan
cia
l per
form
ance
Industry
Size
Geo
gra
ph
y
Bottom performers need to take on more debt to finance their investments
Better working capital leads to better conversion of
EBITDA into cash…
The gapbetween NWC % top and bottomperformers is significant
13.3 percentagepoints
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1. Indu
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2. G
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an
alysis
4. Financial perform
ance analysis
How
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28 Bridging the Gap
292015 Annual UK Working Capital Survey
Investment rate
7.6%
10.1%
NWC %
4.5%
17.8%
ND/EBITDA
2.18
1.93
Companies that are top performers in working capital within their industry sector are also better at generating cash. This is highlighted by CCE that is 9.8pp higher than bottom working capital performers. If bottom performers (lower quartile) were to improve
87.5%
77.7%
CCE
Top performers
Bottom performers
9.8 percentage
points
their CCE to top performers’ levels, they would be able to generate extra GBP 5bn in operating cash flow
Top performers in working capital also require less debt, demonstrated by a lower Net-Debt-to-EBITDA ratio
30 Bridging the Gap
312015 Annual UK Working Capital Survey
Summary Execu
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Wh
at is drivin
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orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
In the UK there is an opportunity to release GBP 24.2bn if under-performers improve to the next quartile
Working capital
£ ££GBP 24.2bn
£
£ £
32 Bridging the Gap
How we can support you
Addressing the key levers: • Identification, harmonisation and improvement of
commercial terms
• Process optimisation throughout the end-to-end working capital cycles
• Process compliance and monitoring
• Creating and embedding a ‘cash culture’ within the organisation, optimising the trade-offs between cash, cost and service
21
34
Complete a working capital benchmarking exercise to compare performance against peers and identify potential improvement opportunities
Assist the realisation of sustainable working capital reduction by implementing robust, efficient and collaborative processes
Perform a diagnostic review to identify ‘quick wins’ and longer-term working capital improvement opportunities
Develop detailed action plans for implementation to generate cash and make sustainable improvements
332015 Annual UK Working Capital Survey
Execu
tive su
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Wh
at is drivin
g w
orking capital?
1. Indu
stry a
nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
Accounts receivable
• Credit risk policies• Aligned and optimised
customer terms• Billing timeliness
and quality• Contract and
milestone management
• Prioritised and proactive collection procedures
• Systems-based dispute resolution
• Dispute root cause elimination
Accounts payable
• Consolidated spending• Increased control with
centre-led procurement• Avoid leakage with
purchasing channels• Payment terms
• Supply chain finance• Payment methods• Eradicate early payments
Examples of areas where PwC could help you to release cash from working capital:
Inventory
• Lean and agile supply chain strategies
• Global coordination• Forecasting techniques• Production planning
• Accurate tracking of inventory quantities
• Differentiated inventory levels for different goods
• Balanced cash, cost and service considerations
Appendices
34 Bridging the Gap
Basis of calculations and limitations
Basis of calculationsThis study is based on financial analysis of the largest 500 UK companies. The Financial Services, Real Estate and Insurance sectors are excluded.
LimitationsCompanies have been assigned to countries based on the location of their headquarters. Although a significant part of their sales and purchases might be realised in that country, it does not necessarily reflect typical payment terms or behaviour in that country.
As the research is based on publicly available information, all figures are financial year-end figures. Due to the disproportionate efforts to improve working capital performance towards year-end the real underlying working capital requirement within reporting periods might be higher. Also, off-balance-sheet financing or the effect of asset securitisation have not been taken into account.
Metric Basis of calculation
NWC % (Net working capital %) NWC % measures working capital requirements relative to the size of the company.
(Accounts Receivable + Inventories – Accounts Payable) / Sales
DSO (Days Sales Outstanding) DSO is a measure of the average number of days that a company takes to collect cash after the sale of goods or services have been delivered.
Accounts Receivable / Sales x 365
DIO (Days Inventories On‑hand) DIO gives an idea of how long it takes for a company to convert its inventory into sales. Generally, the lower (shorter) the DIO, the better.
Inventories / Cost of Goods Sold x 365
DPO (Days Payables Outstanding) DPO is an indicator of how long a company takes to pay its trade creditors.
Accounts Payable / Cost of Goods Sold x 365
CCE (Cash Conversion Efficiency) CCE is an indicator of how efficiently a company is able to convert profits into cash.
Cash Flow from Operations / EBITDA
Investment Rate Investment Rate measures the amount of investment relative to the revenues of a company.
Capital Expenditure / Sales
ROC (Return on Capital) ROC is an indicator of profits as a proportion of a company’s capital.
EBIT x (1 – tax) / Average Total Capital
EBITDA Margin (Earnings before interest, taxes, depreciation and amortisation)
EBITDA Margin is an indicator of a company’s profitability level as a proportion of its revenue.
EBITDA / Sales
Cost of Debt Cost of Debt is the effective rate that a company pays on its debt.
Interest Expense / Average Total Debt
352015 Annual UK Working Capital Survey
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at is drivin
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1. Indu
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nalysis
2. G
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an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
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tacts
36 Bridging the Gap
In the UK and across all sectors there is a total cash opportunity from working capital of more than £24bn primarily concentrated in London & South East
Sector London & S East West & Wales Midlands North East Scotland North West N .I & Isle of Man Total
Retail & consumer 3,138 2,197 925 176 78 253 10 6,778
Energy, utilities & mining 3,892 51 366 39 254 104 28 4,734
Communications 2,245 20 2,265
Engineering & construction 1,375 73 458 15 1,921
Industrial manufacturing 948 81 175 78 324 93 1,699
Aerospace, defence & security 1,640 11 24 1,676
Metals 1,110 13 1,123
Hospitality & leisure 975 109 1,084
Pharmaceuticals & life sciences 909 2 911
Entertainment & media 576 3 3 63 89 733
Transportation & logistics 381 25 41 3 76 525
Automotive 13 11 126 64 215
Technology 218 17 4 27 267
Healthcare 152 13 4 169
Forest, paper & packaging 64 22 4 90
Chemicals 20 29 9 58
Region total 17,656 2,404 1,877 808 742 629 127 24,247
Total cash opportunity from working capital (million GBP)
High opportunity Low opportunity
372015 Annual UK Working Capital Survey
Sampled companies by sector and macro-region
Sector London & S East West & Wales Midlands North East Scotland North West N.I & Isle of Man Total
Aerospace, defence & security 14 2 1 1 18
Automotive 3 1 4 1 1 10
Chemicals 4 1 2 2 9
Communications 16 2 1 19
Energy, utilities & mining 35 7 5 6 9 4 3 69
Engineering & construction 15 6 10 4 35
Entertainment & media 31 1 2 2 2 38
Forest, paper & packaging 7 1 1 9
Healthcare 9 1 1 1 12
Hospitality & leisure 13 10 1 24
Industrial manufacturing 48 6 8 6 4 8 80
Metals 14 1 15
Pharmaceuticals & life sciences 7 1 1 9
Retail & consumer 51 4 15 8 3 12 2 95
Technology 27 2 2 1 3 2 37
Transportation & logistics 7 3 3 1 17
Total 302 26 59 38 23 40 9 496
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4. Financial perform
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38 Bridging the Gap
NWC/Sales by sector and macro-region
Sector London & S East West & Wales Midlands North East Scotland North West N.I & Isle of Man Total
Aerospace, defence & security 16.1% 6.2% 21.5% 2.3% 15.9%
Automotive 5.9% 16.4% 2.8% 1.2% 15.9% 4.4%
Chemicals 13.4% 17.7% 24.8% 21.1% 14.8%
Communications -3.9% 6.6% -6.1% ‑3.8%
Energy, utilities & mining 6.1% 10.3% 21.7% 11.1% 6.9% 13.0% 7.0% 6.5%
Engineering & construction 15.9% 8.6% 49.5% 14.1% 20.1%
Entertainment & media 5.8% 12.8% 6.7% 24.2% 46.3% 6.4%
Forest, paper & packaging 10.2% 15.3% 11.8% 10.6%
Healthcare 17.7% 11.7% 5.4% 44.2% 17.5%
Hospitality & leisure -1.7% -3.3% -5.6% ‑1.9%
Industrial manufacturing 28.3% 15.0% 13.0% 14.6% 28.2% 20.5% 25.3%
Metals 7.9% 20.6% 8.0%
Pharmaceuticals & life sciences 20.5% 9.7% 23.3% 20.5%
Retail & consumer 3.4% 16.5% 11.3% -2.3% 27.8% 4.8% 1.1% 4.6%
Technology 15.3% 28.7% 19.3% 18.8% 7.0% 0.2% 15.4%
Transportation & logistics 1.5% -4.4% 2.9% 9.2% 2.1% 1.5%
Total 7.3% 14.2% 7.2% 9.6% 8.0% 10.8% 9.0% 7.6%
392015 Annual UK Working Capital Survey
DSO by sector and macro-regionE
xecutive
sum
ma
ryW
hat is d
riving
workin
g capital?1. In
dustry
an
alysis2
. Geograph
y a
nalysis
3. Size a
nalysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
Sector London & S East West & Wales Midlands North East Scotland North West N.I & Isle of Man Total
Aerospace, defence & security 55 26 72 23 54
Automotive 51 6 24 5 15 29
Chemicals 34 61 44 52 37
Communications 32 106 25 33
Energy, utilities & mining 30 54 58 32 51 49 34 33
Engineering & construction 65 77 35 45 62
Entertainment & media 101 48 37 96 188 101
Forest, paper & packaging 46 73 34 47
Healthcare 56 56 36 132 57
Hospitality & leisure 18 16 18
Industrial manufacturing 104 69 57 51 79 60 93
Metals 25 68 25
Pharmaceuticals & life sciences 66 58 53 66
Retail & consumer 16 34 32 7 55 39 19 19
Technology 60 69 64 80 49 28 61
Transportation & logistics 21 36 29 36 23 23
Total 38 40 35 26 48 44 47 38
40 Bridging the Gap
DIO by sector and macro-region
Sector London & S East West & Wales Midlands North East Scotland North West N.I & Isle of Man Total
Aerospace, defence & security 47 13 71 3 47
Automotive 33 71 76 78 76 64
Chemicals 37 84 104 110 44
Communications 5 28 10 6
Energy, utilities & mining 23 29 214 38 5 77 4 22
Engineering & construction 38 22 252 101 66
Entertainment & media 36 33 1 36
Forest, paper & packaging 59 119 66 62
Healthcare 101 25 8 115 94
Hospitality & leisure 7 7 43 7
Industrial manufacturing 47 25 58 45 102 69 50
Metals 76 71 76
Pharmaceuticals & life sciences 176 11 126 175
Retail & consumer 48 52 63 18 116 40 47
Technology 53 116 71 10 54
Transportation & logistics 18 7 23 18 5 15
Total 37 44 59 56 12 54 3 39
412015 Annual UK Working Capital Survey
DPO by sector and macro-regionE
xecutive
sum
ma
ryW
hat is d
riving
workin
g capital?1. In
dustry
an
alysis2
. Geograph
y a
nalysis
3. Size a
nalysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
Sector London & S East West & Wales Midlands North East Scotland North West N.I & Isle of Man Total
Aerospace, defence & security 41 17 63 67 41
Automotive 69 10 99 79 27 83
Chemicals 19 76 32 56 23
Communications 86 144 87 87
Energy, utilities & mining 34 159 87 19 34 91 17 34
Engineering & construction 46 76 58 88 52
Entertainment & media 280 54 561 32 273
Forest, paper & packaging 71 153 56 75
Healthcare 84 43 38 47 80
Hospitality & leisure 38 51 124 40
Industrial manufacturing 48 47 72 42 60 48 50
Metals 68 61 68
Pharmaceuticals & life sciences 147 44 55 146
Retail & consumer 53 19 50 35 40 70 21 49
Technology 61 43 57 203 104 140 62
Transportation & logistics 37 64 46 22 25 37
Total 54 28 73 45 35 61 26 53
42 Bridging the Gap
Authors of the study
Daniel WindausUK Partner, Lead AuthorT: +44 20 7804 5012E: [email protected]
Daniel is a partner in our working capital practice, with over 16 years of working capital experience. He has advised company management and private equity investors on improving cash flow throughout Europe and North America.
Saverio MitraniManagerT: +44 7711 562120 E: [email protected]
Saverio is a manager in the firm’s working capital practice and has spent his career delivering working capital and cash flow related projects across the UK and internationally. His expertise covers all the key areas of working capital, from order-to-cash to inventory management and procure-to-pay.
Daniel Windaus
Saverio Mitrani
Contacts
Stephen TebbettDirectorT: +44 20 7213 5511E: [email protected]
Stephen is a working capital director working across the UK regions. He has a proven track record of complex working capital change programmes across a diverse range of industries and company sizes. Prior to joining PwC Stephen worked in the telecoms sector.
Stephen Tebbett
Glen Babcock
Glen BabcockUK PartnerT: +44 20 7804 5856E: [email protected]
Glen is a partner in our working capital practice, leading our work across the regions of the UK. He has worked with companies across the UK, Europe and internationally focusing on cash flow improvement and cost reduction.
Simon BoehmeDirectorT: +44 20 7212 6927E: [email protected]
Simon is a director in our working capital practice with over 10 years of working capital experience. He advises corporates on working capital improvement across Europe, the Middle East and Asia.
Simon Boehme
Robert SmidUK PartnerT: +44 20 7804 3598E: [email protected]
Robert leads our working capital practice and brings over twenty years of working capital advisory experience. He has made an instrumental difference to the free cash flow and balance sheet structure of many companies.
Robert Smid
43
Denmark
Bent Jorgensen T: +45 3945 9259E: [email protected]
Middle East
Mihir Bhatt T: +971 4304 3641 E: [email protected]
Malaysia
Ganesh Gunaratnam T: +603 2173 0888E: [email protected]
Switzerland
Reto Brunner T: +41 58 792 1419 E: [email protected]
Germany
Rob KortmanT: +49 1709 879253 E: [email protected]
Finland
Michael HardyT: +358 50 346 8530E: [email protected]
Turkey
Gokdeniz GurT: +90 212 376 5332 E: [email protected]
The Netherlands & Belgium
Danny Siemes T: +31 88 792 42 64 E: [email protected]
France
Francois GuilbaudT: +33 156 578 537 E: [email protected]
Hong Kong
Ted Osborn T: +852 2289 2299E: [email protected]
Norway
Jørn Juliussen T: +47 95 26 00 60E: [email protected]
USA
Paul GaynorT: +1 925 699 5698E: [email protected]
Spain
Josu EcheverriaT: +34 91 598 4866E: [email protected]
Singapore
Peter Greaves T: +65 6236 3388E: [email protected]
CEE
Petr SmutnyT: +42 25 115 1215 E: [email protected]
Italy
Riccardo Bua OdettiT: +39 026 672 0536 E: [email protected]
Sweden
Jesper LindbomT: +46 70 9291154 E: [email protected]
Working Capital Management Global Network
Australia
David Pratt T: +612 8266 2776 E: [email protected]
Execu
tive su
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Wh
at is drivin
g w
orking capital?
1. Indu
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nalysis
2. G
eography
an
alysis3. Size
an
alysis
4. Financial perform
ance analysis
How
we ca
n su
pport youA
ppend
ices &
Con
tacts
432015 Annual UK Working Capital Survey
Austria
Christine CatastaT: +43 1 501 88 1100 E: [email protected]
pwc.com/workingcapitalsurvey
PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
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Design Services 21810 (08/15).