PwC Middle East Working Capital Study 2021: Companies must embrace capital efficiency to recoup and sustain value creation

PwC Middle East today launched its “Middle East Working Capital Study 2021”. The study highlights the importance of working capital efficiency as a key measure of business competitiveness and how, now more than ever, working capital management must be considered a strategic priority for companies. boards of directors and management teams.

The financial efficiency of businesses in the region is declining just when effective cash management and capital efficiency are most needed. Revenue decreased by 14% in the region in the first half of 2020 (compared to the first half of 2019). Governments and businesses in the region have taken different measures to support the efficiency of their working capital in response to the pandemic and the resulting changes in consumer demands. Some sectors and companies have rebounded stronger than expected, while others are still vulnerable.

With up to $27.8 billion of excess working capital continuing to be trapped on the region’s corporate balance sheets and the long-term deterioration of other regional performance indicators such as EBITDA and the RoCE, the opportunity cost of this excess working capital has never been higher. Recovering this untapped working capital and using it to fund internal growth, invest in innovation or redistribute profits to shareholders can create an opportunity to optimize corporate balance sheets and support value creation.

Latest Working Capital Trends

Although Net Working Capital Days (NWC) remained unchanged in fiscal 2020, it continued to show a general downward trend over the past five years. The working capital performance of the companies in our study was marked by a significant increase in days payable to creditors. Additionally, the speed at which businesses were able to collect money deteriorated in 2020, reaching a five-year low with an average of 99 days to get paid after an invoice is issued. . This deterioration in working capital performance is due to a combination of factors, but the lack of liquidity and the uncertainty of cash flow due to the pandemic are two main factors.

Working capital by company size, country and industry

Larger companies continue to perform significantly better than smaller groups and are three to five times faster when it comes to converting cash. Despite this, the implications of the pandemic have affected working capital in 2020 for all businesses, regardless of size. Companies that had invested in the capabilities and technologies of their people were better able to adapt their operations quickly and, therefore, cope better.

Saudi Arabia continues to be the country with the longest working capital cycle in the region. While the UAE’s working capital performance finally saw a reversal after deteriorating since 2015. Both the UAE and Qatar saw a slight year-on-year deterioration in working capital performance despite some improvements in some businesses which offset the negative operating performance in both countries.

When it comes to working capital in industries, the engineering and construction sector continues to have the highest average level of working capital, followed by pharmaceuticals and life sciences. While the hospitality and leisure sector recorded the second worst year-over-year performance in 2020, impacted by COVID-19 global travel restrictions and lockdown measures. Additionally, the healthcare sector has been one of the key sectors that have been affected by the COVID-19 pandemic and it has seen significant deterioration, despite the benefits of COVID-19 testing and patient visits.

Mihir Bhatt, Director of PwC Middle East, said: “As business returns to pre-COVID-19 levels, we expect to see reinvestment in working capital and further upward pressure in the short term. and medium term on average days of working capital. This means that companies with a clear strategy for where to invest and how to manage their enterprise-wide working capital will gain a significant competitive advantage. »

Mo Farzadi, Head of Corporate Restructuring Services, PwC Middle East, said: “Supply chain and inventory optimization remains a significant area of ​​opportunity for companies, not only to optimize the capital efficiency, but also to reduce costs contributing to the company’s bottom line.

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