Majority of CFOs predict ‘working capital conditions will worsen’
Around 73 per cent of CFOs faced challenges in managing working capital this year, with most expecting it to become increasingly difficult over the next 12 months, a recent McGrathNicol report has found.
The latest McGrathNicol Working Capital Report has found that while the length of working capital cycles shortened by 5.6 days in 2023, releasing an additional $12.3 billion in cash, 73 per cent of CFOs faced challenges managing working capital this year.
The report, which surveyed a mix of SMEs and ASX-listed companies found that while days working capital decreased in all sectors, 47 per cent of companies were not able to achieve a reduction in working capital and saw days working capital increase.
“If not managed well, this can put pressure on operations and limit a company’s ability to invest in growth opportunities, capital expenditure, people, and new technologies,” the report warned.
The report noted that businesses faced difficult trading conditions in 2023 including inflationary pressures, poor weather conditions, labour shortages, and higher costs of funding.
The survey of CFOs revealed that 73 per cent faced challenges managing working capital this year.
Among the companies that did reduce days working capital, this was primarily driven by a decrease in inventory holdings of close to two weeks as pressures on global supply chains eased and companies’ unwound inventory levels built up in 2022.
McGrathNicol Advisory partner Sean Wiles said 2023 saw the largest reduction in inventory since McGrathNicol began tracking Working Capital performance 11 years ago.
“Inventory levels still remain above pre-COVID levels though, and inventory cycles are 1.5x and 1.2x longer than in the US and Asia. This presents an opportunity for Australian businesses to make further improvements,” said Mr Wiles.
The cash benefit from reducing inventory was mostly consumed by management teams shortening their supplier payment metrics, which saw days payable outstanding also reduce by close to two weeks, the report said.
Businesses were also able to reduce the time it took to collect from their customers in 2023, with days sales outstanding decreasing by 5.8 days as companies collected cash from their customers more quickly.
In terms of the outlook for 2024, seven in 10 surveyed CFOs expect working capital and cash flow management to become even more difficult over the next 12 months.
Mr Wiles said that Australian businesses will need to carefully manage their inventory in 2024 to protect against future supply chain disruptions posed by conflicts in the Middle East, warehousing capacity issues and higher input costs.
“Demand forecasting, inventory monitoring, diversification of suppliers, and an agile yet disciplined approach to inventory management will ensure businesses can quickly change course and respond to future challenges and opportunities,” he said.
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