Working capital management

The need for working capital management is urgent as the uncertainty in global economy and market continues. Undeniably, cash is becoming an increasingly pressured resource, and yet many organisations have underutilised the cash potential in their balance sheets and instead relied excessively on external financing which inevitably erodes margin.

Working Capital Management (WCM) establishes the optimal levels of working capital required in a business. The deployment of various WCM methodologies and protocols help to free up and regenerate potentially high levels of cash otherwise tied up within organisations. WCM programs lead to fast reductions in invested capital, higher profitability, and improved shareholder value.

Working Capital Management Programs are a Key Driver of Shareholder Value, and Self-funding

Example: 

Company value = free cash flow / (risk less growth)

Assume a company generates $100 in free cash flow and $110 in earnings before interest, tax, depreciation and amortisation (EBITDA). Risk as measured by the company’s cost of capital is 20%, and based on historical data the future growth rate is expected to be 3% per year.

Using the valuation framework above, the company could be valued at $588.

$100/(20%-3%) = $588 or 5.3 times EBITDA.

Given that cash is often the most cost-effective source of available funding, senior management are frequently eager to implement WCM strategies. The benefits of successful WCM programs can be fast to materialise, with initial results realised within a three-month timeframe and are sustainable. By optimising the amount of working capital required, our clients benefit from increased cash availability from the areas of Payables and Procurement, Inventories, Revenue Management, and Accounts Receivables Management. It also helps to streamline service levels, reduce wastage and rework and improve operational control. WCM programs are therefore self-funding.

The need for Working Capital Management is driven by both macro-economic and company internal factors

At PwC we favour a three-step approach.

Starting with a working capital benchmarking exercise to compare performance against your peers and identify your scope of opportunities, we then follow three steps:

1. Perform a diagnostic review
Identify quick wins and longer-term working capital improvement opportunities (based on mapping your processes to the best-in-class comparators).


2. Develop a detailed action plan
Detail the steps needed to generate cash and make sustainable improvements.


3. Implement sustainable working capital management programs

  • Mapping, rationalisation and improvement of commercial terms.
  • Process optimisation throughout end-to-end working capital cycles.
  • Compliance and monitoring
  • Create and embed a cash culture within the organisation, where the trade-offs between cash, cost and service are evaluated and optimised.

Large APAC corporates, private equity and distressed companies facing liquidity issues but trying to avoid liquidation. Under an M&A context, our work can be assimilated into both pre-deal and post-deal stages.

A potential client for WCM would be one with the following traits:

  • Net working capital level in excess of 10-15%+ of gross sales
  • High levels of raw materials/WIP/ finished goods inventories which account for 10% or more of the portfolio value and are slow-moving or obsolete
  • High proportion of receivables, notably with high amounts over 60 days and 90 days overdue, indicating risks of write-off
  • Constantly delaying payment to suppliers, which masks the overall net working capital position
  • Excessively reliance on external financing which results in a high gearing ratio

Contact us

Michael Gildea
Partner
Tel: +[852] 2289 1816
Email

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