Working Capital

Study 21/22
From recovery to growth in the
face of supply chain instability
Contents
Executive Summary 1
The pandemic impacted Net Working Capital 4
Signs of recovery, but agility remains a concern 8
Fragile supply chains put stress on working capital 12
Moving From just-in-time to just-in-case 16
Return generation has suffered across sectors 18
How we can help 22
Authors 23
Contacts 24
Executive summary
The corporate focus is shifting from
stabilise and survive to recovery
and growth. But unstable supply
chains are disrupting operations
and heightening the pressure on
working capital – the cash needed
to run the day-to-day operations of
any business.
Why it matters
Net working capital (NWC) days reached a
record high in 2020, driven by the shock and
uncertainty of the COVID 19 pandemic. Amid
ongoing supply chain disruption, managing and
right-sizing working capital will continue to be
a major challenge. While many of the spikes in
working capital had unwound by mid-2021, the
ending of government support, elevated levels
of debt and the decrease in returns all mean
that capital efficiency has to be front of mind as
we go into 2022.
65%
of executives in our recent
Business Survey named
working capital efficiency
as a critical objective for
change management and
restructuring activities.
1 | Working Capital Study 21/22
The pandemic exposed the slow reaction of
supply chains to external shocks, leading to a
significant rise in NWC during Q2 and Q3 2020.
This lack of agility in adapting working capital
levels to disruptive external events is a concern
as we face continued challenges in the global
supply chain.
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. Instances of both excess and
insufficient stock are higher than ever. The
heightened complexity and lack of visibility
over most supply chains mean the move from
‘just in time’ to ‘just in case’ planning in order to
manage supply risk may bring further working
capital challenges.
That is why 65% of executives in our recent
Business Survey named working capital
efficiency as a critical objective for change
management and restructuring activities.
What the survey tells us
Net Working Capital

5%
spike in NWC days
2020 saw the largest movement in NWC days
in five years, driven by a revenue decline which
nominal working capital has not been able to
respond to. This movement has taken NWC days
to a five-year-high.

Payment morale has deteriorated

7%
increase in both days sales
outstanding (DSO) and days payables
outstanding (DPO) annually
Rather than being a structural change in how working
capital is managed, these movements largely stem from
poor payment practices on both sides of the fence.

High debt, low returns

Net debt is at
a five-year-high
Companies have also experienced the lowest return
on invested capital (ROIC) over the same period.

2 | Working Capital Study 21/22

 Supply jolt

63%
of respondents in manufacturing rank
supply chain issues as a key concern.
While some companies may look to lengthen stock
coverage to ensure supply, the risks of over and
undershooting of inventories are high.

Inventory on the rise

6%
Up in 12 of 17 sectors analysed since
Q2 2019 and 6% overall.
Many sectors have yet to return to their
pre-pandemic level of performance.

Working capital efficiency critical

65%
of executives named working capital
efficiency as the main objective
for change management and
restructuring activities.

3 | Working Capital Study 21/22

The pandemic
impacted
Net Working
Capital

4 | Working Capital Study 21/22

As anticipated in our previous study, the
turmoil of the pandemic saw NWC days
reaching a record high in 2020. Global
revenues saw an 8% decline from two years
before, which was a significant factor in the
8%
decline in global revenues from
increase in NWC days. two years prior.

The movement in working capital reflects what

happens when companies look to pull short-term
levers. DSO reached a five-year-high, increasing 7%
annually to 54.1 days as customers delayed payments.
At the same time, and partially as a knock-on impact,
companies stretched their creditors, with DPO also
5%
increase in inventory days.
increasing by 7%, breaking a four-year trend of
shortening payment days. With increased uncertainty
over demand and supply, inventory days also saw an
increase of 5%. However, the impact wasn’t felt evenly
across all industries and regions, and the lack of agility to
react to changes at pace will continue to be a significant
driver of working capital.

Figure 1: Net working capital and working capital days

44.9 days
44.3 days

42.9 days 42.9 days

5.9

40.7 days
5.5 5.5

5.2

4.4

2016 2017 2018 2019 2020

NWC days NWC total €tr

5 | Working Capital Study 21/22

Figure 2: DSO, DIO and DPO trends

54.1
50.0 50.6
DSO

49.1 48.2

2.3 3.6
0.9

-1.7

63.8 63.5
59.5
62.5
DIO

56.6 2.8
1.0
-1.3

-6.9

75.4
72.2 72.2

68.9
67.2
5.0
DPO

-1.7
-3.2 -3.3

2016 2017 2018 2019 2020

Days change year on year Days (Sales Outstanding / Inventory Outstanding /

Payables Outstanding respectively)

6 | Working Capital Study 21/22

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, for now at least. Cash days
(represented as days of cover for operating expenses)
have increased by 14 days to a five-year-high.
1.4%
drop in ROIC, its lowest level for
five years.
With the winding down of government support, it’s
important to keep a close eye on capital efficiency and
liquidity. ROIC took a hit, dropping by 1.4% to its lowest
level for five years. At the same time, net debt levels are
at five-year-high. 8%
increase in Net debt to EBITDA ratio.

Figure 3: Liquidity and financial performance trend

Cash Days

51 50 49 53 67

Return on Invested Capital (%)

7.3% 8.3% 8.4% 7.3% 5.9%

Net debt to EBITDA Ratio

2.4 2.2 2.4 2.5 2.7

2016 2017 2018 2019 2020

With the winding down of government support, it’s important

to keep a close eye on capital efficiency and liquidity.
7 | Working Capital Study 21/22
Signs of recovery,
but agility remains
a concern

8 | Working Capital Study 21/22

The deterioration in working
capital performance reflected the
exceptional volatility experienced
by many companies. The pandemic
has also exposed the slow reaction
of supply chains to external shocks,
leading to a significant spike in
working capital days during Q2
and Q3 2020.
Since Q3 2020, there have been signs of
recovery, with revenues growing above pre-
pandemic levels. However, it’s sobering to note
how little the nominal value of working capital
changed during one of the most significant
demand and supply shocks for many years.
This lack of agility to move with external events
meant NWC days rose seven days above
pre-pandemic levels at it's peak.
While overall NWC remained fairly flat,
outside of a Q3 2020 peak, analysis of the
components of nominal NWC reveals an
interesting set of trends.
Inventory, which is a leading measure due to the
need to build up stock up ahead of the return
of revenue, saw a sharp increase of €0.6tn
(22%) in Q3 2020 before declining in the next
quarter. Even before the pandemic, there were
growing concerns over global supply chains and
availability of goods. The sharp decline in Q4
2020 may also be explained by scarcity rather
than normalising inventory requirements. By
Q2 2021, Inventories were up 7% from pre-
pandemic levels.
Nominal working capital
has been unresponsive.

Figure 4: Quarterly movements in revenue, net working capital and working capital days

47.3 46.6 €7.6

€7.2 €7.2 €7.3
41.7
40.3
38.9 38.8 38.6
€6.9
€6.6

€5.8

€3.6
€3.2 €3.1 €3.2 €3.3
€3.0 €3.1

Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021

NWC days Revenue €tr NWC total €tr

9 | Working Capital Study 21/22

Receivables broadly tracked the direction of
revenue, though were unable to move at the
same pace. This meant that while nominally
receivables declined in Q2 2020, DSO was
at its peak, as longer payment terms and
delinquent customers increased proportionally.
Receivables then grew from Q2 2020 to Q2
2021, up by 8% from Q4 2020 levels.
In Q3 2020, a similar but less exaggerated rise
was seen in payables compared to the spike
in inventory, aligning to goods and materials
bought on credit. By Q2 2021, payables grew
at a faster rate than other metrics, ending 12%
up from Q4 2019, offsetting the increases in
inventories and receivables. So it looks like
the trend to stretching creditors to balance out
working capital is back.

Figure 5: Quarterly DSO, DIO and DPO trend by Q2 and Q4 2019-2021

55.2
47.6 48.0

47.3 7.9 46.9

1.1
DSO

-0.3
-8.3

56.1 59.3

10.8 50.9
48.5 48.2
2.7
DIO

-7.6
-11.1

70.7
64.9
61.8
12.2
58.5 59.8
5.1
DPO

-3.3

-3.2 -3.3 -10.9

Q2 2019 Q4 2019 Q2 2020 Q4 2020 Q2 2021

Days change quarter on quarter Days (Sales Outstanding / Inventory Outstanding /

Payables Outstanding respectively)

10 | Working Capital Study 21/22

Figure 6: What are the objectives of your change Improving working
management or restructuring? ( rank 1 to 3) capital efficiency is
the main objective for
Improve working capital efficiency
change management
27% 22% 16% and restructuring.
Improve diversity and inclusion within our organisation
Sixty-five percent of
18% 19% 15%
respondents ranked
it within their top
Rationalise costs within the business
three motivations.
14% 19% 18%

Shift business model to improve financial performance and profitability

18% 14% 15%

Rationalise a complex internal structure

10% 7% 15%

Make or supply chain more socially responsible

5% 8% 9%

Make our supply chain more environmentally sustainable

5% 7% 8%

1 2 3

11 | Working Capital Study 21/22

Fragile supply
chains put stress
on working
capital

12 | Working Capital Study 21/22

Continued disruption in global PwC’s 2021 Manufacturing COO Pulse Survey
supply chains is having a major found that 63% of respondents rank supply
impact on working capital chain as a key concern. Some companies may
look to lengthen stock coverage to ensure
performance across sectors and
continuity of supply. But this may result in both
regions. The list of drivers fuelling over and undershooting risks, which may also
supply chain volatility is growing have knock-on impacts further down the line,
amid the ongoing impacts of including strains on warehousing capacity and
COVID-19 on operations. These future obsolescence.
include Delta variant outbreaks
in factories and ports in Asia,
constraints on shipping lane
availability, lack of HGV drivers,
material shortages such as rare
metals and semiconductor, as well
as the energy crisis.
63%
rank supply chain high/very high priority
A perfect storm of supply constraints and
rapidly changing consumer demand mean that
the risk of excess is just as prevalent as the Figure 7: % selecting ‘supply chain risk
potential for insufficient stocking. management’ as a business priority in the
next 1-2 years
Companies are having to re-evaluate planning
and production. Shortages of raw materials
Low Very high
will inevitably result in stock shortages and
operational disruptions in manufacturing 11% 19%
businesses. Logistics volatility, as well as
the drive to Net Zero, are likely to lead to an
increase in nearshoring where possible, along Moderate High

with a heightened focus on the stability of

critical external suppliers.
26% 44%

A perfect storm of supply constraints and rapidly changing

consumer demand mean that the risk of excess is just as
prevalent as the potential for insufficient stocking.

13 | Working Capital Study 21/22

The impacts of volatility on • Consumer: The sector has seen major
supply chains, working capital swings in demand. The electronics
and inventory especially have had subsector also experienced particular pain
from the semiconductor shortages. The
different effects across sectors:
result has been a volatile overall inventory
position. This grew by 11 days from Q4
• Aerospace & Defence: While being a
2019 to Q2 2020 (17%) as a result of a slight
broad sector, it is heavily weighted towards
deterioration in quarterly trading.
the aircraft industry. The industry’s long
lead times and complex value chain were
• Industrial manufacturing: Inventory
unable to respond within the first half of
days rose by 6.8 days between Q2 2019
2020, and even as we move into Q2 2021,
and Q2 2020 as inventory was unable to
inventory days are 10.9 days (19%) above
respond elastically to changes in demand.
2019 levels.
Manufacturers also felt significant pressure
during this period as shoring up supply
• Automotive: The decline in revenue during
of materials became a critical issue. This
2020, along with long lead times, led to a
trend was reversed by Q4 2020 and both
peak in days inventory outstanding (DIO) of
revenue and inventories appear to have
74.4 days in Q2 2020, 23.6 days ahead of
returned to pre-pandemic levels.
Q2 2019. While sector demand recovered,
the supply constraints associated with
• Retail: Overall, the sector has shortened
the semiconductor shortage have limited
its inventory position. But fashion and
trading recovery, while shortening inventory
luxury retailers saw their performance
days, settling at 50 days by Q2 2021, 0.8
deteriorate and it is yet to fully recover, as
days below Q2 2019 levels.
discretionary retail was forced online, and
fashion trends shifted.

14 | Working Capital Study 21/22

Figure 8: Quarterly DIO trend by sector

Difference in DIO % difference Difference in DIO % difference

Q2 2019 to Q2 2021 Q2 2019 to Q2 2021
Aerospace & Defence Engineering & construction

10.9 19% -7.7 -9%

Automotive Hospitality and leisure

-0.9 -2% 10.9 35%

Chemicals Industrial manufacturing

-6.9 -9% -1.0 -2%

Consumer Retail

0.6 1% -1.9 -3%

*for sectors with material inventory components

Supply Chain Aerospace & Automotive Consumer Engineering & Industrial

Priorities for Defence Construction Manufacturing
the next 2 years

1 Sourcing
Reliability
Demand
forecasting
Supply Chain
Transparency
Cost Control
Supply Chain
Transparency

2 Demand
forecasting
Cost Control Cost Control
Sourcing
Reliability
Demand
forecasting

3 Cost Control
Vertical
Integration
Vertical
Integration
Vertical
Integration
Cost Control

PwC 2021 Manufacturing COO Pulse Survey*

15 | Working Capital Study 21/22

Moving From
just-in-time to
just-in-case

16 | Working Capital Study 21/22

 2
During times of uncertain demand, agility in
the supply chain and inventories are more
important than ever. At the same time, the
ability to shore up supply is essential. The
sight of a container ship stuck in the Suez
Canal has become the most vivid symbol of
the supply chain vulnerabilities exacerbated
by the pandemic. The sheer complexity of
today’s supply chains presents a risk in
itself. A lack of visibility and end-to-end
understanding deprives an organisation
of the insights that it will rely on to prevent
3 Data alerts you to imminent shortages, quality
future shortages or quality concerns.
Deploy data to view suppliers across
key domains
Monitor supplier strength through multiple
perspectives, including geometrics, financial
health, operational agility, commercial
performance, regulatory performance, legal
standing, ethics, sustainability, governance and
cyber resilience.
Create a response plan
deficiencies and other potential risks. It allows
you to get ahead of the curve. A timely and
proactive response depends on preparation and
requires a holistic and cross-functional approach
that goes beyond the supply chain professional.

1
Know your suppliers
Many firms only have a superficial
Drive value at the same time
understanding of their suppliers, and many fail
to look beyond Tier 1. Supply chain mapping
will help you understand how suppliers across
4 While building supply chain resilience is important,
it’s possible to create synergies by linking it into
broader initiatives, such as contract lifecycle
every tier integrate and interact, and allow you
management, optimising procurement spend and
to spot geographical and speciality gaps.
optimising the right safety and cycle stock.

Proactive – Preparing for the next crisis to mitigate risks

Visibility & Flexibility Integrated Risk Sustainability Tailored

transparency information managment commercial
arrangements

• Real time supply • Multi-sourced, Live cross- • Key external Holistic resilience Aligning supplier
chain mapping agile and buffered functional data to: and internal approach involving: relationships to:
• Increasing visibility supply chain. • Forecast demand indicators across • ESG • Meet your
of vulnerabilities • Responsiveness • Drive efficiencies risk domains • Cyber risk appetite
and to changes • Collaborate • Forecasting and • Evolving risks • Maximise
interdependencies in demand responding to commercial
and supply disruptions performance

Proactive – Flexibility in adapting to supply chain shocks

to accelerate recovery

Technology enabled insights within the Supply Resilience tool will enable robust governance of the key resilience pillars

Resilience Criticality Supply chain Strategic

indicators indicators Partnerships intervention

17 | Working Capital Study 21/22

Return generation
has suffered
across sectors

18 | Working Capital Study 21/22

Between 2019 and 2020, 10 out of 17
sectors saw a deterioration in NWC days.
Four of these sectors saw a double-digit
deterioration – Aerospace & Defence,
Hospitality & Leisure, Automotive and Energy
& Utilities, reflecting the shock suffered in
these sectors during the pandemic.
Of the sectors experiencing a decline in NWC days,
all but one (Metals & Mining) also saw a deterioration
in ROIC. As companies transition from recovery back
to growth, it’s important to ensure that this growth
generates value. Working capital is a key driver of capital
efficiency, and our analysis indicates that improving
working capital can playing a key role in strengthening
returns across sectors.

Figure 9: Change in NWC days and change in ROIC from 2019 to 2020

Aerospace,
defence & security -9.2% 44.6%

Hospitality
& leisure -9.6% 42.5%

Automotive -1.1% 18.1%

Energy & Utilities -2.6% 11.8%

Pharmaceuticals
& life sciences
-0.2% 3.6%

Industrial
manufacturing -1.2% 3.4%

Consumer -0.9% 1.9%

Engineering
& construction -0.6% 1.9%

Chemicals -0.6% 1.8%

Metals and Mining 0.6% 1.5%

Technology -1.9% 0.4%

Forest, paper
& packaging -2.3% 0.1%

Entertainment
& media
-2.8% -3.7%

Transport &
logistics -5.3% -0.2%

Healthcare -6.2% 0.2%

Retail -11.0% -0.7%

Communications -20.7% -0.2%

% change in NWC days Percentage point change in ROIC

19 | Working Capital Study 21/22

Figure 10: Asset days / DPO days

12.0

Automotive

10.0

Energy & Utilities

Aerospace,
defence & security

8.0
Difference in DPO

6.0

Healthcare Entertainment & media

4.0 Forest, paper
Consumer
& packaging
Chemicals
Technology
Industrial manufacturing
Metals and Mining

2.0 Engineering
Hospitality
Retail & construction
& leisure

Pharmaceuticals
& life sciences
0.0
Communications

-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0 30.0 32.0 34.0 36.0 38.0 40.0 42.0 44.0

Difference in asset days

Improvement in NWCD 2019 to 2020 Deterioration in NWCD 2019 to 2020
Note: size of bubble represents the scale of the absolute YoY change in NWCD

20 | Working Capital Study 21/22

21 | Working Capital Study 21/22
How we can help
We help our clients to:
• Identify and realise cash and cost benefits across the • Create a ‘cash culture’ and upskill the organisation
end-to-end value chain through our working capital academy

• Improve operational processes that underpin the • Roll out trade and supply chain financing solutions
working capital cycle
• Create short term cash flow forecasting and related
• Implement digital working capital solutions and action plans
data analytics
• Stand up surge teams and resolve backlogs
• Achieve cash conservation in crisis situations

Where and how we could help you to release cash from Working Capital

Accounts receivable Inventory Accounts payable

• Tailored, proactive collections
• Credit risk policies
• Aligned and optimised
customer terms
• Billing timeliness & quality
• Contract &
milestone management
• Systematic dispute resolution
• Dispute root cause elimination
• “Surge” operational bandwidth
• Negotiation strategy and support
• Lean & agile supply
chain strategies
• Global coordination
• Forecasting techniques
• Production planning
• Inventory tracking
• Balancing cost, cash and
service level considerations
• Inventory parameters &
controls defining target stock
• Consolidated spending
• Increasing control with centre
led procurement
• Helping avoid leakage with
purchasing channels
• Payment terms
• Supply chain finance benefits
assessment & implementation
• Helping eradicate
early payments
• Payment methods
• Negotiation strategy and
support

22 | Working Capital Study 21/22

Authors
Daniel Windaus
Partner, PwC UK
T: +44 7725 633420
E: daniel.windaus@pwc.com

Andrew Brady
Working Capital, PwC UK
T: +44 7483 417068
E: andrew.brady@pwc.com

Contributions from:

Mark Anderson
Partner, Supply Chain Resilience Leader
T: +44 7770 921256
E: mark.r.anderson@pwc.com

Emma Tyler
Supply Chain and Third Party Risk and Resilience,
T: +44 7595 611480
E: emma.tyler@pwc.com

23 | Working Capital Study 21/22

Contacts
Canada Malaysia/Vietnam
Joe Rafuse Ganesh Gunaratnam
E: joe.rafuse@pwc.com E: ganesh.gunaratnam@pwc.com

Denmark Middle East

Rene Brandt Jensen Mihir Bhatt
E: rene.brandt.jensen@dk.pwc.com E: mihir.bhatt@pwc.com

Finland Poland
Michael Hardy Pawel Dżurak
E: michael.hardy@fi.pwc.com E: pawel.dzurak@pl.pwc.com

France Russia & CIS

Arthur Wastyn Vadim Khrapoun
E: arthur.wastyn@pwc.com E: vadim.khrapoun@ru.pwc.com

Germany and Austria Spain

Rob Kortman Will Extra
E: rob.kortman@pwc.com E: william.extra@pwc.com

Hong Kong & China Switzerland

Peter Greaves Benjamin Rutz
E: peter.greaves@hk.pwc.com E: benjamin.rutz@ch.pwc.com

India The Netherlands

Neeta Phatarphekar Danny Siemes
E: neeta.phatarphekar@pwc.com danny.siemes@pwc.com

Ireland UK
Declan McDonald Daniel Windaus
E: declan.mcdonald@ie.pwc.com E: daniel.windaus@pwc.com

Italy Stephen Tebbett

Paolo Menafoglio E: stephen.tebbett@pwc.com
E: paolo.menafoglio@pwc.com
USA
Japan Rob Vettoretti
Yusuke Onishi E: r.vettoretti@pwc.com
E: yusuke.onishi@pwc.com

24 | Working Capital Study 21/22

pwc.co.uk/services/business-restructuring

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