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$460bn liquidity just waiting to be freed up

July is the start of the working capital analyses season. The reports come from many different consultancies and analysts who all have various approaches to benchmarking the capital performance of companies against their peers. J.P. Morgan claim, in the launch of their Working Capital Index, see, that this is primarily because of the lack of accessible and reliable industry data

To address this, J.P. Morgan has introduced the J.P. Morgan Working Capital Index to capture the working capital metrics of the S&P 1500 companies. They claim that, “When tracked over time, the Index can provide insights into working capital trends that help finance practitioners plan and track the progress of various working capital initiatives within their organizations.”

JPM Working Capital Index 

The Working Capital Index calculation measures three sets of datapoints to provide a holistic view of the working capital trends in the period between 2011 and 2018. The Working Capital Index tracks:

  1. the average net working capital/sales values across the S&P 1500 companies
  2. the average cash/sales values across the S&P 1500 companies
  3. the Cash Conversion Cycles (CCC), or the number of days it takes to convert inventory purchases into cash flows from sales across the S&P 1500 companies which is derived from three components:
    • DaysPayableOutstanding(DPO)
    • DaysInventoryOutstanding(DIO)
    • DaysSalesOutstanding(DSO).

Main findings and conclusions

Overall the main findings were:

Source & Copyright©2019 - J.P. Morgan 

J.P. Morgan’s main conclusions/recommendations were:

  • As always, with Working Capital studies, the analysis showed that there is “significant money on the table” and J.P. Morgan believe that “access to capital remains tight for the foreseeable future and attention is moving towards working capital optimization to supplement existing sources of capital.”
  • CFOs and treasurers are now committed to improving internal sources of liquidity, making working capital optimization an important priority
  • Don’t go for quick wins, instead go for “sustainable working capital improvements which require a more structured approach and cannot be left to chance. Quick fixes like payment term extension that are not in sync with industry standards may potentially harm supplier relationships.”
  • Leverage industry insights and best practices, “Finance and treasury practitioners can leverage the Working Capital Index and underlying industry insights as a starting point to benchmark performance, guide action plans and monitor progress.”

CTMfile take: One of the key jobs of a corporate treasurer is to make liquidity available in the right place at the right time to ensure that the business can take advantage of the opportunities as and when they opening which is where effective working capital come in. The surprising thing about this JPM Working Capital Index analysis is the size of the liquidity available, but will corporate treasury departments really exploit the opportunity? What should they do first?

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