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Working capital “to shape Australian firms’ post-Covid agility”

Despite operational challenges created by Covid-19 pandemic, many of Australia’s business sectors have fared well this year, while their short-term financial position of Australian business will set the pace of national post-pandemic economic recovery, says McGrathNicol Advisory’s 2021 Working Capital Report.

The specialist advisory and restructuring firm surveyed 137 Australian Securities Exchange (ASX)-listed companies, finding that revenues have increased by an average of 8.6% in 2021, with 69% of operators reporting revenue growth.

The report shows that several Australian industries, including retail, agriculture and mining/resources, have largely shrugged off the impact of the pandemic. Growth has been driven by a mix of higher commodity prices and offshore demand, higher production yields and consumers directing spending away from travel and recreational activities and into the booming retail sector.

A deteriorating measure

The positive revenue trends are, however, offset by an increase in Days Working Capital (DWC). The key measure of cashflow management lengthened by 3.1 days in 2021, reflecting an eight-day increase in H2 2021 alone as companies held more stock for longer and were slower to collect cash from debtors.

This translated to an additional A$5.5 billion (US$4bn) in cash being locked up in company working capital cycles and Australian companies holding back on payments to suppliers as they attempted to protect their own cashflow.

The year ahead is expected to present further challenges. The Australian Bureau of Statistics (ABS) reported that unemployment rose to 5.2% as the economy shed more than 46,000 jobs; a worse-than-anticipated figure. Like many other countries, Australia is feeling the impact of delays in international supply chains that have created a “perfect storm” for retailers and manufacturers.

The impact of the pandemic is also persisting, with Australia now easing its tough border restrictions – which has kept the number of Covid cases and related deaths relatively low since March 2020

A bumpy outlook

The Reserve Bank of Australia has warned that Australia’s economic outlook remains uncertain and uneven, with the lengthening of working capital cycles likely to make businesses less prepared to face the challenges that lie ahead.

McGrathNicol Advisory partner Jason Ireland told the Australian Financial Review that he expects Australia’s economic recovery to be led by businesses with efficient working capital cycles. A shorter working capital cycle in which the company collects cash faster from customers while holding an optimal level of inventory enables capital to be deployed faster to drive growth or navigate a crisis. Companies with a shorter working capital cycle are better placed to pay suppliers faster, which has a positive impact on the rest of the economy.

The 2021 Working Capital Report found sharp variations in company performance, with the difference between the best and worst performers being greater than 100 days in five of the seven sectors, and greater than 200 days in three of those sectors: agriculture, retail and food/beverages.

Ireland also told AFR that he hopes companies will use the months ahead to improve their performance, warning that working capital hold ups will hamper businesses in 2022. “Our research shows that a material competitive advantage can be achieved by implementing best practice,” he commented.

“The companies that have improved their working capital processes will thrive. The best way you have more cash in your working capital cycle is to collect payments faster from your customers, and that will have a positive impact on your inventory and companies in your supply chain.”

His colleague, McGrathNicol partner Sean Wiles, added that 2022 will present opportunities for growth for Australian firms in all sectors but how teams manage their working capital will determine how well they capture that opportunity. “The businesses that are ahead of the working capital cycle and managing their cash flow are best placed to pull the broader economy back from the brink,” he added.

Ireland recommends establishing a strong process for collecting payments, based on strong customer engagement to ensure the company fulfils their expectations, a clear contract, and good processes to track compliance. “Best practice processes for billing and managing cashflow will mean there is more cash flowing through a business. This in turn leads to better inventory management and will help other companies down the supply chain.”

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