Delayed invoice payments at 5-year high

The net working capital days now exceed six weeks – a record high – and with issues such as supply chain interruptions, it could become even longer, said Daniel Windaus, business restructuring services partner at PwC.

“With ongoing instability in the global supply chain, including port closures, limited shipping lane availability, lack of HGV drivers, and shortage of raw materials, managing inventory is a key focus. The risk of excess is just as prevalent as the potential for insufficient stocking,” he said.

“As issues come to the boil in the wholesale energy sector, there will be knock-on effects on companies’ working capital requirements.”  

The report showed that as customers delayed payments (the days sales outstanding) the length of time taken for invoices to be paid reached a five-year high, increasing to almost eight weeks (54.1 days), up 7 per cent annually. At the same time, and partially as a knock-on effect, companies stretched their creditors, with days payables outstanding also increasing by 7 per cent to more than 10 weeks (72.2 days), breaking a four-year trend of shortening payment days. With increased uncertainty over demand and supply, the time inventory remained on shelves before being sold increased by 5 per cent to more than eight weeks (59.5 days).

While working capital consumed a larger portion of capital, significant government support and readily available debt have allowed many companies to sustain a strong cash position. Cash days (represented as days of cover for operating expenses) have increased by 14 days to a five-year high.

However, the nominal value of working capital has changed very little during one of the most significant demand and supply shocks for many years.

While overall nominal working capital remained fairly flat, outside of a peak in Q3 2020, analysis of the components of nominal working capital reveals that inventory, which is a leading measure due to the need to build up stock ahead of the return of revenue, saw a sharp increase of 22 per cent (0.6 trillion euros) in Q3 2020 before declining in the next quarter.

Even before the pandemic, there were growing concerns over global supply chains and the availability of goods. The sharp decline in the last quarter of 2020 could be explained by scarcity rather than normalising inventory requirements. By the second quarter of 2021, inventories were up 7 per cent from pre-pandemic levels.

“The deterioration in working capital performance reflected the exceptional volatility experienced by many companies. The pandemic also exposed the slow reaction of supply chains to external shocks. Lead times and replenishment strategies are being stretched even for regional supply chains, meaning safety, stock and inventory policies need to be adapted regularly,” Mr Windaus said.

“The lag between the cash outflows from sourcing materials and producing inventories ready to sell, and the cash collected from sales is lengthening.”

The analysis shows 10 out of 17 sectors saw a deterioration in NWC days between 2019 and 2020 with four sectors – aerospace & defence, hospitality & leisure, automotive and energy & utilities seeing a double-digit deterioration, reflecting the shock suffered in these sectors during the pandemic.

“There is a perfect storm of supply constraints and rapidly changing consumer demand. Companies are having to re-evaluate planning and production. Shortages of raw materials will inevitably result in stock shortages and operational disruptions in manufacturing businesses. Logistics, volatility, as well as the drive to Net Zero, are likely to lead to an increase in nearshoring where possible, along with a heightened focus on the stability of critical external suppliers,” Mr Windaus said.