Are you leaving cash on the table? - Working capital management report 2018
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Are you leaving cash on the table? Working capital management report 2018
Contents
Foreword ....................................................04 Executive summary ...................................06 Need for a focus on working capital ..............08 Working capital overview for India.................10 Sector insights.............................................18 Impact of the Goods and Services Tax (GST)...22 Working capital financing..............................24 Delivering working capital excellence.........26 Industry views............................................28 How we can help?........................................30
Foreword
E
fficient working capital management is one of the fundamental
elements for the financial and operational success of any business.
Transformational value can be created by effectively combining the
strengths of people, process and technology to improve the balance
between profitability and liquidity.
In current times, managing cash and liquidity effectively is imperative given
the significant increase in non-performing assets and ballooning corporate
balance sheets. Further, the recent implementation of the Goods and Service
Tax (GST), technological advancements and alternative sources of debt-
funding are providing companies and opportunity to rethink their approach
towards resourcefully and most effectively managing their working capital.
In this context, the theme of our annual working capital management report
this year is “Are you leaving cash on the table?” In this edition, we have
analyzed the working capital performance of leading companies in India for
FY17 and Q18. Based on our research, we have discovered and analyzed
some of the key trends across industries and the potential opportunities for
corporate India to release trapped cash from their working capital.
As per our findings, the overall cash-to-cash (C2C) deteriorated by 4% in
FY17 vis-a-vis FY16 and payables are being stretched to fund working capital
requirements. Also, Indian companies continue to have a longer C2C cycle
compared to their global peers across a number of sectors. This presents
corporate India with significant opportunities for working capital optimization.
Our analysis shows that by adopting better working capital practices, India Inc.
can release INR1.8 trillion of cash trapped in the corporate balance sheets.
We believe this report can benefit both industries and practitioners in their
analysis and decision-making processes by providing the requisite insights
into managing capital better. It is our endeavor to help contribute to Indian
corporates release cash and support investments in growth.
Naveen Tiwari
Partner and Leader,
Working Capital Advisory Services, EY India
Executive S
There is a considerable need for Indian
companies to focus on working capital Deteriorated
optimization
Improved
4 pp* 1.1 pp*
Increase in C2C days in Increase in short-term debt as
FY17 compared to FY16 a percentage of sales in FY17 Payables are being
as compared to FY16 stretched in order
to manage working
Sufficient cash on the table improves return on capital capital
employed and credit profile, and increases cash
availability for all stakeholders
Large firms have significantly more
5 days
efficient working capital management as Increase in payables in FY16
as compared to FY14
compared to the smaller firms
Timely payment to vendors
can have a positive impact
54 days on margins due to improved
supplier relationship (from
discounts, rebates etc.)
Difference between the C2C
of large and small firms
In addition to better negotiating leverage, larger
companies adopt better operating practices, which drive
improved working capital
*percentage point
Summary
Top 3 sectors with the highest C2C in FY17
The overall cash
Engineering and
opportunity for India
Pharmaceuticals Chemicals Inc.
Engineering,
Procurement, and Construction
(EPC) companies
INR1.8
Compared to other regions, there appears to be a
significant scope of optimizing working capital for India
Inc. by adopting efficient working capital practices
trillion
GST can prove to be both a challenge
and an opportunity to effectively manage
working capital
Impact of GST on working capital performance:
Supply chain Timing of tax Utilization of
efficiencies payments input credits
Difference in Restriction on utilization Refund of
tax rates of duty credit scrips export claims Cash on the
table!
Managing the complexities and extracting maximum
benefits from the working capital opportunities presented
by the GST regime would be a key area of focus in the
short-term
Are you leaving cash on the table?
1 Need for a focus on
working capital
There is a considerable need for Indian companies to
focus on working capital optimization.
Working capital management report - 2017 9
While the overall free cash flow (FCF) has improved since •• Better return on capital employed
2014, it declined by about 20% (0.7ppts) between 2016
•• Reduce interest expense, thus increasing cash flow to
and 2017. This was combined with an increase in the C2C
shareholders
cycle over the same period.
•• Better credit profile
In order to fund the increased cash needs, there has been a
significant increase in short-term borrowings. •• Positive impact on margins due to improved supplier
relationships (i.e. discounts from timely payments)
However, the ability of the firms to service the debt (interest
coverage) has been steadily declining over the years. •• Increased cash availability to fund growth initiatives
(e.g. capex and acquisitions)
There is a great need for the top management teams to
focus on optimizing working capital. Having sufficient cash
on the table provides numerous advantages:
Need to focus on working capital optimization
FCF
(% of sales) Short-term debt
(% of sales)
12.4%
3.4%
11.3%
2.7% 11.0%
2.2%
9.6%
2014 2015 2016 2017 2014 2015 2016 2017
-0.5%
C2C (days) Interest coverage ratio
3.6
(EBIT/Interest expense)
45
44
44
43 3.1 3.1 3.1
2014 2015 2016 2017 2014 2015 2016 2017
Are you leaving cash on the table?
2 Working capital
overview for India
Cash-to-cash (C2C) cycles for India inc. has deteriorated
by 4% in FY17 cycle as compared to FY16.Working capital management report - 2017 11
Payables are being stretched in order the top 25 sectors analyzed. Companies miss out not only on
immediate opportunities such as early payment discounts but
to manage working capital also on the opportunity to get further discounts from suppliers
While there have been year-on-year variations, the overall by using credit terms effectively.
C2C cycle broadly remained stable between 2014 and Inventory levels have also increased in FY17 as compared
2017. However, on closer inspection, there was a significant to FY16. In addition to inefficiencies in the supply chain,
deterioration in receivables, which was countered by an inventory levels appear to have been impacted by the recent
almost equivalent increase in payables. increase in underlying input prices (e.g. oil, steel, coal etc.).
It appears that companies in India find it easier to manage Our analysis estimates that about INR1.8 trillion of cash is on
their cash needs by stretching payables rather than bringing in the table for India Inc., to be released if companies were to
operational efficiencies across the board. In FY17, an increase adopt efficient working capital practices.
in DPO (days payable outstanding) was observed in 14 out of
India Working capital metrics
45
44 53
44
51
43
48
46
2014 2015 2016 2017 2014 2015 2016 2017
C2C DSO
47 47 54
53
45
44 49
48
2014 2015 2016 2017 2014 2015 2016 2017
DIO DPOAre you leaving cash on the table?
Large firms have significantly more Performance comparison between large, mid-sized
and small Indian companies
efficient working capital management
as compared to smaller firms Top Mid Low
Our analysis shows that the C2C for larger companies (top EBITDA margin 16% 14% 14%
one-third by revenue) is significantly lower than for smaller
companies (bottom one-third by revenue). Larger companies
PAT margin 7% 3% 2%
have better negotiating leverage and operating efficiencies,
thus driving improved collections and relatively lower
inventory levels. Interest coverage 3.6 1.8 1.5
The larger firms appear to be relatively well managed which
means that in addition to having a better working capital ROCE 6% 3% 2%
performance, they also have better profitability and higher
return on capital.
WC comparison between large, mid-sized and small companies
100
92
90
80
80 77 75
70 67
60 57 55 55
53
Top
Days
50 47
44 Mid
40 38 Low
30
20
10
0
C2C DSO DIO DPO
Top: Top 166 companies Mid: Top 167—332 companies Low: Top 333—500 companies
Note:
by revenue in FY17 by revenue in FY17 by revenue in FY17Working capital management report - 2017 13
There is a significant scope of Working capital performance across geographies for
top sectors
optimizing working capital for India
Inc. across certain sectors when Compared to developed economies, Indian companies appear
to have a longer C2C cycle, signifying opportunities to adapt
compared with other regions better working capital practices, thus releasing trapped cash.
Specifically, significant working capital improvement potential
WC performance across geographies exists across sectors including the engineering and EPC
India US Europe China Brazil services, technology, chemicals and auto parts as compared
to some of the other regions like the US, Europe etc.
C2C 44 31 41 98 42 Receivables for Indian engineering and EPC services
companies were more than two times those of companies
in the US, Europe and China. Delays in project execution
DSO 51 37 40 56 46 combined with inadequate documentation have led to
stretched receivables for Indian companies.
DIO 47 31 38 124 37 High DSO days for technology companies in India
predominantly drive a longer C2C cycle compared to other
developed regions.
DPO 53 37 37 82 41
Outstanding Government subsidies for fertilizer and agro-
chemical manufacturers in India contribute to high DSO days
for the chemicals sector.
Similarly, higher levels of inventory and faster vendor
payments by Indian auto parts companies have driven
higher working capital needs as compared to the US, Europe
and China.WC comparison
across sectors
Metals and Automobile
Oil and gas Technology
mining manufacturers
and geographies
C2C 19 49 -7 75
DSO 12 38 25 89
India DIO 49 69 38 2
DPO 43 57 70 17
C2C 23 64 -2 48
DSO 37 33 24 61
US
DIO 23 60 28 5
DPO 37 30 54 17
C2C 38 68 15 67
DSO 35 30 22 88
Europe DIO 31 70 47 23
DPO 28 31 54 44
C2C 17 16 -1 25
DSO 13 38 67 48
China DIO 31 51 27 27
DPO 27 73 95 50
C2C 29 62 - 249
DSO 22 41 - 270
Brazil
DIO 32 57 - 1
DPO 24 37 - 22Accessories Engineering
Pharma-
and luxury Utilities and EPC Chemicals Auto parts
ceuticals
goods services
20 48 137 89 48 102
27 91 192 82 51 76
27 23 50 65 50 80
34 66 105 57 53 55
69 33 54 62 41 81
35 49 86 49 55 63
58 26 3 53 42 43
25 43 35 40 56 25
81 23 57 56 32 119
29 52 71 30 61 94
88 13 40 50 36 64
36 41 54 24 64 39
76 31 109 22 27 189
36 52 88 42 80 76
100 29 157 47 42 162
60 50 136 66 96 49
165 20 413 9 75 170
144 60 559 18 45 135
57 2 34 43 59 50
35 42 180 52 29 16Are you leaving cash on the table?
YTD working capital
overview
An analysis of the working capital metrics of the available data set in India (219 firms of the top 500 firms) as at 1H18 shows
marginal improvement in working capital performance as compared to H1 FY17.
The C2C movement of the top companies between H1 FY17 and H1 FY18:
Most of the sectors showed an improvement in C2C in H1 FY18
63
58
49 49
41 41
31
27
C2C DSO DIO DPO
H1 FY17 H1 FY18Working capital management report - 2017 17
WC performance, H1-FY18
Sectors C2C H1 FY18 C2C change (vs. H1 FY17)
Metals and mining 27 -36%
Oil and gas (19) 75%
Automobile manufacturers 2 -588%
Technology 68 2%
Accessories and luxury goods 23 80%
Pharmaceuticals 109 6%
Engineering and EPC services 31 -19%
Telecommunications (78) 40%
Chemicals 69 -17%
Utilities (15) 147%
Auto parts 38 4%
Cement and building products 43 -9%
Distributors 36 -23%
Food producers 45 -14%
Textiles 92 0%
Electrical components and equipment 111 5%
Diversified industrial products 89 -6%
Media and entertainment 63 49%
Logistics and transportation 47 0%
Consumer products (non durable) 19 -44%
Retail 24 -24%
Consumer products (durable) 32 -8%
Improved DeterioratedAre you leaving cash on the table?
3 Sector
insights
C2C performance varies across sectors and is impacted
by changes in government regulations, commodity price
fluctuations and the changing business environment, in
addition to the inherent inefficiencies in the system.Working capital management report - 2017 19
Working capital performance varied significantly across There is a significant correlation between a change in working
sectors in FY17. Many sectors recorded an improvement in capital and a change in short-term debt used by companies.
working capital performance as compared to FY16 but many For instance, sectors such as oil and gas and metals and
sectors operated at higher working capital levels as compared mining display a significant increase in C2C days with a
to FY14. corresponding increase in the short-term debt, signifying
increased funding needs.
Working capital performance across sectors, FY17
Engineering and EPC services 137
Pharmaceuticals 102
Chemicals 89
Technology 75
Metals and mining 49
Utilities 48
Auto parts 48
Accessories and luxury goods 20
Oil and gas 19
Automobile manufacturers -7
-20 0 20 40 60 80 100 120 140
C2C (days)Are you leaving cash on the table?
Change in C2C and short-term debt (FY17 vs. FY16), and free cash flow (% of FY17 sales)
20
Oil and gas
15
10
Change in C2C days (vs. FY16)
5 Automobile
manufacturers
Metals and mining
0
Engineering and EPC
services
Technology
-5 Auto parts
Utilities
Chemicals
Pharmaceuticals
-10
Accessories and luxury Goods
-15
-4% -2% 0% 2% 4% 6% 8%
Change in short-term debt as a % sales (vs. FY16)Improved Deteriorated
Oil and gas 49
46 43 There was significant deterioration
39 in C2C days between FY16 and
Number of companies FY17. This was mainly driven by an
with improved/ 19 increase in DIO by 10 days, which
deteriorated WC w.r.t. 10 12 appears to be due to the increase in
FY16 3 underlying oil prices, thus impacting
both inventory value and volume.
2 10 C2C DSO DIO DPO
Metals and mining 64
69
58 57 The metals and mining sector saw a
46 49 deterioration in C2C in FY17 mainly due to
41 38
Number of companies an increase in the working capital of steel
with improved/deteriorated companies. This appears to have been
WC w.r.t. FY16 driven by disruption in coke/coal imports
impacting inventory values and payables.
17 23 C2C DSO DIO DPO
The overall C2C reduced in FY17 across the
Engineering and 194 192
construction and engineering sector primarily
EPC service 145 137 due to improvement in inventory days. While
105105 the receivables days also decreased, receivables
Number of companies management continues to be a significant
with improved/deteriorated 56 50 challenge for the sector. This sector continues
working capital w.r.t. FY16 to be troubled by project delays, liquidity crunch
and inherent inefficiencies in the system,
17 C2C DSO DIO DPO
19 leading to a C2C cycle of over four months.
The pharmaceuticals sector witnessed a large
Pharmaceuticals 111
102 improvement in C2C days in FY17 as compared
84 76 80 80 to FY16. While this is an improvement over
FY16, the overall working capital performance
Number of companies 53 55
is broadly in line with the average performance
with improved/deteriorated
across FY14 and FY15. Some of the
WC w.r.t. FY16
improvements in FY17 over FY16 were driven
12 by companies engaging in factoring and bill
17 C2C DSO DIO DPO
discounting to reduce receivables.
Auto components 52
53 The auto components sector experienced a
51 marginal improvement in C2C days in FY17
50 50 50 mainly due to an increase in payable days,
Number of companies which was partially offset by an increase
48 48
with improved/deteriorated in inventory days. A significant increase in
WC w.r.t. FY16 key input commodity prices (steel, rubber,
copper etc.) along with an increase in
15 19 C2C DSO DIO DPO imports impacted the payables.
Chemicals 95 The overall C2C days across the
89 88
82 chemicals sector reduced in FY17
62 65 largely driven by a significant decrease
55 57
Number of companies in receivables. The fertilizers and
with improved/deteriorated agrochemicals and diversified chemical
WC w.r.t. FY16 sectors demonstrated a reduction in
DSO, which was partly driven by a
25 28 C2C DSO DIO DPO reduction in outstanding subsidies.Are you leaving cash on the table?
4 Impact of the
Goods and Services Tax
GST can prove to be both a challenge and an
opportunity to effectively manage working capital.Working capital management report - 2017 23
Managing the complexities and extracting the In India, transitional credit in some cases has been
maximum benefits from the working capital delayed due to system-related glitches and lack of
opportunities presented by the GST regime would be data readiness. Firms with strong working capital
key areas of focus for businesses in the short-term. management are expected to tackle the short-term
disruption better than firms with lesser focus on cash
The transition from the old tax structure to GST initially
management.
impacted the working capital cycle of companies.
GST impact
Impact on supply chain Impact on the timeline of tax payment
The implementation of a nationwide tax structure is Earlier, there were different dates of cash outflow for
expected to bring supply chain efficiencies such as various taxes levied such as excise duty, service tax
network consolidation and manufacturing footprint and VAT. Under GST, the consolidated tax will have to
rationalization, and enable free flow of goods across be paid at once. On the one hand, firms will need to
states. GST will present firms with an opportunity to manage the cash flow to support the increased outflow
not only optimize costs but to also have a lean supply at one go, while on the other hand, firms would be
chain with lower required inventory levels. able to enjoy additional float for the amounts that they
would have paid at multiple points in time in the earlier
However, taxing stock transfers, though credit is
regime.
available, has added extra working capital requirement
considering the disposal cycle of the goods received via Impact of difference in tax rates
the stock transfer mode.
Under the erstwhile tax regime, firms were required
Impact on receivables and payables to pay a service tax of 15% on the procurement of
services as against GST of 18% thereof under the
With the credit eligibility restricted to making payments
current regime. The additional tax component would
within 180 days, firms would be required to optimize
also contribute to an increased cash flow requirements
their procure-to-pay processes to optimally utilize
of firms where there is a substantive procurement of
the available input credit. On the other hand, firms’
services.
suppliers would have to bring in process efficiencies
to optimize invoicing processes and to take maximum Similarly, where the effective rate on goods is higher
advantage of this favorable regulation. under the GST regime as compared to the erstwhile
regime, there could be a cash flow impact to the extent
Impact due to refund of export claims
Due to system-related issues, there has been a delay
in disbursement of export refund claims for exporters.
This has caused a strain on working capital in the initial GST is a game-changing reform for
months of the GST implementation for firms with the Indian economy. For businesses, GST has
substantial exports.
opened up avenues for efficiencies, reducing
Impact due to restriction on utilization the cascading of taxes across the supply chain.
of duty scrips A study of the working capital scenario could
Duty credit scrips issued under the Foreign Trade help the industry optimize the benefits of GST
Policy are not allowed to be used for payment of GST by undertaking relevant changes to mitigate
in the current regime. This could also have an impact negative impacts, if any.
on working capital where there has been a reliance on
duty scrips for the payment of the applicable taxes/
duties in the earlier regime. —Suresh Nair
Partner, Indirect Tax, EY IndiaAre you leaving cash on the table?
5 Working capital
financing
In addition to operational efficiencies, CFOs are
continuously exploring new ways of financing working
capital needs.Working capital management report - 2017 25
All businesses need funds to run their operations. Traditionally, working capital funding has been arranged through banks using
instruments such as overdrafts, cash credit and line of credit. Over the years, firms and banks have come up with new ways of
working capital financing that are attractive and accessible to a wider set of companies.
Debt capital markets Supply chain financing
There has been a significant increase in stressed assets Channel financing has been employed in India for quite some
(NPAs and restructured assets), which has led to a decline in time as an alternate means of raising working capital finance
new lending. Lending from banks to Indian corporations for dealers and suppliers of firms. This provides the dealers
declined by 5.2% in FY17 as compared to a growth of 2.8% and suppliers with a line of credit through their relationships
in FY16, which has had an impact on both short and with corporates (based on the corporate credit rating),
long-term financing*. which, on a standalone basis, would be difficult to obtain. For
corporates, this helps mitigate the risk of short supplies or
Alternative funding solutions such as corporate bonds and
loss of sales due to a lack of funds in its supply chain.
commercial papers have emerged as short-term funding
instruments. Consequently, as per RBI's annual report,the The traditional approach to channel financing is changing.
share of banks in credit decreased from 50% to 38% in Fintech firms are developing technology platforms that
FY17. Commercial papers are generally bought by mutual are intended to help MSMEs sell their receivables at a
funds and as these are unsecured, funding through discount, thus freeing up cash for operational needs. Such
commercial papers is largely available to companies with a platforms and technologies are already well established in
healthy credit rating. However, due to the impact of the recent developed markets. Further, RBI has come up with Trade
monetary policy announcements, companies may have to pay Receivables Discounting Systems (TReDS) which acts as an
a higher rate of interest for short-term borrowing through exchange for MSMEs to discount their invoices.
commercial papers.
A few businesses are also currently experimenting with
disruptive technologies such as blockchain to streamline the
*Source: 'We need a bank just for long-term credit” - C Rangarajan
vendor payment processes.
and S Sridhar, Published in the Business LineAre you leaving cash on the table?
6 Delivering working
capital excellence
Increasing use of analytics and technological advances
are assisting to drive working capital excellence.Working capital management report - 2017 27
A working capital optimization drive requires better decision-making. Process improvements
strategic and disciplined efforts from the leadership aimed at the lead time reduction, better customer
team and needs to be communicated to all work engagement and improved vendor relations have a
streams and business units. Technology plays a key direct impact on reducing working capital. Last, but
role in driving working capital optimization in several most importantly, when an organization decides to
ways, such as by providing real-time and clearer implement a working capital improvement program,
insights on the working capital position, enabling people across functions should be pulling in the
same direction with a strong internal leadership.
Agile supply chain:
Conduct robust sales and operations Supplier management:
planning combined with flexible Leverage “timely payments” as a tool
supply chain to meet dynamic to develop better supplier relationship
Customer engagement:
demand requirements and reduce sourcing costs
Facilitate greater collaboration
with customers, resulting in
better payment terms and Enhanced role of finance:
collection efficiencies. Move from a
“transactional” approach
to business partnering to
help functions manage
trade-offs between cost
and cash
Analytics:
Use big data to
enhance control
through improved
visibility, and
decision support Cash culture:
Embed a “cash
Process culture” in the
organization
across
functions
Robotic process
automation(RPA):
Use emerging technologies
System People
such as RPA for automating
repetitive transactional
Organization
processing
structure:
Establish
adequate role
definitions and
Automation in supply chain: clearly defined
Leverage upcoming advances RACI
such as drone technology in
warehousing and logistics
Management focus:
Strike a balance between
competing priorities and
Digitization: appropriate incentives for
Implement an end-to-end “cash” focus
integration application
to eliminate manual
processes
Governance:
Establish a robust governance
structure, metrics and regular
reportingSelection of a funding mechanism for
working capital may also have negative
tax effects. In a multinational corporate
environment, generally the infusion
of working capital is done through a
related party arrangement. This should
be evaluated for the recent changes in
Industry
the tax regime from the transfer pricing
insights perspective regarding deduction of
interest expense from the taxable income
and consequently the higher effective tax
rate.
Recent regulatory changes have made
working capital management highly
vulnerable. Another important aspect
for working capital management within
organizations is the efficient management
of some hidden elements in working
capital, for example, timely utilization
of available input tax credits (indirect
taxes) and MAT credits (direct tax). If
not managed efficiently, at times these
elements are large enough to make a dent
in the profitability via higher interest costs
on borrowed funds/loss of opportunity
cost on own funds.
Sanjeev Agarwal
Head of Finance of a major
auto companyWorking capital management is critical Working capital management has
to any organization, whether in the past, become more critical than ever before
current or future, since it has a direct for us. The telecom sector has seen
impact on fund management, policies, more than its fair share of turmoil and
discipline, interest cost and the overall consolidation resulting in cash becoming
profitability of the company. king more than ever before. Debtors and
inventory of fixed assets are the critical
Working capital management is a
components in our sector (telecom tower)
controllable factor and is the lifeline for
that impact working capital within any
any organization. It requires complete
telecom firm. The key strategies employed
focus by all in the organization. The key
by management to optimize working
factors in our sector (electronics retail)
capital are mainly around engaging with
are inventory and receivables. As we are
customers to ensure prompt payments,
growing, we are trying to ensure that
having a hard look at inventory norms,
our trade partners also focus on efficient
aging of inventory and pulling back of the
working capital management to achieve
same.
higher turnover and rotation of funds.
In the future, working capital requirements
We try to arrange funds at competitive
will influence many decisions, including
rates under the ‘channel finance’ program
new projects. To get working capital
of banks and NBFCs for our trade partners
financing, it is easy for well-rated firms
to match our growth. For efficient working
as there is more money chasing fewer
capital management, many controls
good assets. Things have become more
are centralized in spite of decentralized
difficult for corporates/firms which
branch operations. We continue to focus
may not have good ratings. Working
on our credit rating to ensure adequate
capital management has become more
facilities at competitive rates.
challenging than ever. Demonetization
Post GST implementation, there was some did have an impact on working capital of
initial impact on cash flow due to IGST on many firms and the jury is still out if all of
imports and stock transfer, but it should the impact is behind us or not. However,
streamline in a few months. GST will have a permanent impact as
corporates/firms will not be able to take
credit of taxes if matching has failed. They
will also then need to engage with their
partners to ensure that the GSTN portal is
corrected before the corporate/firm can
Sanjay Bhargava take credit.
Director, CFO and Company
Secretary, Sony India
Hemant Kumar Ruia
CFO, Indus TowersHow
EY’s India team of dedicated working capital professionals
can help you identify, evaluate and prioritize realizable
improvements to liberate significant cash tied up in working
we can
capital.
We assist organizations in their transition to a cash-
help
focused culture and help implement the relevant metrics to
prioritize focus on working capital. We also identify areas
for improvement in cash flow forecasting practices and
assist in implementing processes to improve forecasting
and frameworks to sustain those improvements. In addition
to increased levels of cash, implementation of working
capital improvement initiatives results in significant
economic benefits from productivity improvements, reduced
transactional and operational costs, lower levels of bad and
doubtful debts, and reduced inventory obsolescence.EY’s working capital optimization framework
Process and practice
Cash flow
Order to cash (OTC) management
Credit
Sales Contractual Order Invoice Collections Dispute Cash
risk
mgmt. terms processing processing strategies resolution application •• 13-week rolling
mgmt.
cash forecast
Forecast to fulfil (FTF) •• Cash flow
budgeting and
Order Customer planning
Product Planning,
Demand Supplier processing service and
range purchasing and •• M
► anaging day-
forecasting mgmt. and inventory
mgmt. replenishment to-day cash
distribution levels
flow operations
Procure to pay (PTP) •• F
► inance
function
Purchase Goods effectiveness
Procure Sourcing
Supplier request and Invoice Supplier Payment
-ment and
rationalization and order invoice processing terms processing
planning contracting
fulfilment receipt
People and organization
Systems and toolsMethodology
The report contains findings of an analysis of the working capital performance of the
leading 500 companies (by sales of FY17) headquartered in India. All the data points
have been sourced from S&P Capital IQ. This analysis excludes sectors such as financial
institutions, infrastructure and real estate corporations, and companies that were listed
after FY14 (as their data for historical comparison was not available).
Our overall analysis draws on companies’ latest fiscal 2017 reports and compares
performance in 2017 with that in 2016 and in some instances with that of a further three
previous years.
The analysis is segmented by country, sector and company. It uses metrics to provide a
clear picture of overall working capital management and to identify resultant levels of cash
opportunity. The analyzed numbers have been calculated on a sales-weighted basis. Each
of the companies analyzed in this research has been allocated to an industry.
The opportunity of cash release through working capital optimization has been computed
by comparing the C2C days of a company with the average C2C days for its sector. The
total cash release opportunity highlighted in this report is the sum of potential cash release
opportunities for companies were they to operate at their respective sector C2C averages.
Glossary
• Days sales outstanding (DSO): year-end trade receivables divided by full-year sales
and multiplied by 365 (expressed as the number of days of sales, unless stated
otherwise)
• Days inventory outstanding (DIO): year-end inventories divided by full-year sales and
multiplied by 365 (expressed as the number of days of sales, unless stated otherwise)
• Days payable outstanding (DPO): year-end trade payables divided by full-year sales
and multiplied by 365 (expressed as the number of days of sales, unless stated
otherwise)
• Cash-to-cash (C2C): equals DSO plus DIO minus DPO (expressed as the number of
days of sales, unless stated otherwise)
• Percentage of EBITDA/sales: EBITDA (earnings before interest, tax, depreciation and
amortization) divided by full-year sales (expressed in percentage)
• Return on capital employed (ROCE): full year PAT (Profit after tax), divided by year-
end capital employed (sum of total equity and debt), expressed in percentage
• O&G: oil and gas
• M&M: metal and mining
• IT: information technology
• WC: working capital
• TWC: trade working capitalWorking capital: Self-diagnostic center
C2C DSO DIO DPO
Sector Q1 Median Q3 Q1 Median Q3 Q1 Median Q3 Q1 Median Q3
Oil and gas 11 21 37 9 19 24 35 40 54 21 28 59
Metals and
32 61 114 29 42 73 43 70 95 29 44 78
mining
Automobile
-12 -8 -4 16 20 27 13 26 37 42 51 65
manufacturers
Technology 57 72 87 72 88 106 0 0 5 7 16 32
Accessories and
64 112 151 7 33 72 72 115 143 23 38 83
luxury goods
Utilities 18 71 111 52 88 136 5 15 26 21 26 88
Engineering and
73 120 179 81 144 244 16 52 112 64 104 139
EPC services
Chemicals 52 74 105 47 61 86 41 61 75 35 45 66
Auto parts 28 45 68 38 51 68 34 48 61 42 53 60
Pharmaceuticals 72 101 113 59 77 91 63 77 91 37 51 62
Tele-
-41 -24 -14 26 42 59 0 1 2 56 75 86
communications
Cement and
17 42 66 21 37 69 35 41 53 31 41 52
building products
Food producers 17 50 113 13 28 38 31 50 154 23 31 43
Distributors 32 36 67 45 68 113 10 21 30 29 42 71
Diversified
industrial 33 62 137 56 66 107 35 54 77 44 59 80
productsWorking capital: Self-diagnostic center
C2C DSO DIO DPO
Sector Q1 Median Q3 Q1 Median Q3 Q1 Median Q3 Q1 Median Q3
Consumer
products (non -6 25 64 21 27 37 31 48 70 32 60 67
durable)
Electrical
components and 64 93 174 40 104 135 51 69 98 37 62 90
equipment
Textiles 70 106 131 42 50 71 65 83 117 21 33 57
Retail 22 34 52 4 26 49 30 44 72 28 36 52
Logistics and
14 38 78 38 56 69 1 5 52 24 39 54
transportation
Airlines -34 -23 -16 4 5 15 5 6 7 25 34 56
Media and
-2 34 79 29 71 90 2 7 21 21 29 47
entertainment
Consumer
products 48 76 109 26 47 89 50 61 80 28 38 59
(durable)
Ports and
-28 19 71 24 63 82 12 17 28 22 31 69
shipping
Ecommerce -3 -3 -3 29 29 29 0 0 0 31 31 31
Healthcare 1 6 21 35 38 38 8 10 17 31 37 42
Paper and forest 27 36 55 15 26 66 53 59 71 32 69 103
products
Aerospace and 335 335 335 184 184 184 206 206 206 55 55 55
defense
Restaurants -10 13 37 16 29 43 10 12 14 20 28 36EY offices
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