B2B Payments

Waking Up To Proper Cash Flow Management

Small businesses are struggling to manage their cash flow, and a new report from PwC examines just how far SMEs have dropped in their cash flow management performance. The research finds that, overall, the world’s companies are realizing the importance of prioritizing working capital. But some of the toughest challenges ahead are hitting SMEs the hardest.

The latest Global Working Capital Survey by PwC found that companies across the world have finally woken up to the vitality of proper cash flow management. “After years of working capital deterioration,” the reports said, “companies have realized that optimizing working capital is crucial, and failure to manage it properly can have a serious impact on their ability to fund their day-to-day operations.”

Researchers found an overall 11.3 percent increase in the volume of working cash held by businesses – an increase, PwC said, that represents the most dramatic improvement in corporate cash flow management in the last four years. Days working capital (the time it takes for companies to turn working capital into revenue) dropped by 2.9 percent from the year prior to 40.1 days, a level that hasn’t been seen since before the financial crisis, the report said.

More than half of the companies surveyed, PwC said, improved their working capital in the last year.

One of the key drivers behind the improvement in working capital management is companies’ reinforcement of accounts receivables operations. PwC found that days sales outstanding is at a five-year low of 43.6 days, but researchers found that businesses have still yet to address billing timeliness and other B2B billing issues.

Days payable outstanding also saw a slight decline to 57.4, though that figure is still higher than 2012 levels. “There is certainly untapped opportunity in this space relating to new developments such as supply chain finance, dynamic discounting platforms and overall supplier performance (including goods in transit, inventories and returns),” the report concluded.

A Widening Gap

Unfortunately, not all of PwC’s report contained good news. Despite working capital management improvement, analysts found that companies will still need an estimated $259 billion to finance their growth in the coming year, and some major challenges could get in the way of that achievement.

Overall, small businesses were found to be struggling the most with their cash flow management, with PwC describing SMEs’ working capital management performance as facing a “steep decline.” Their high net working capital figures are coupled with a lower ability to convert EBITA (earnings before interest, taxes, depreciation, and amortization) into cash.

The gap between the performance of large and small businesses in this area is growing, too, largely driven by the fact that SMEs are facing more expensive funding from external sources. With the average cost of debt hitting 5.5 percent for SMEs, compared to 4.5 percent for large corporations, and a lower cash conversion efficiency rate than mid-level or large corporations, small businesses’ cash flow management performance appears to be on the decline.

Banks and alternative lenders are becoming an important source for cash flow, but PwC found that it’s not enough – companies must begin to generate their own cash flow streams, rather than taking on more debt. Companies’ levels of debt spiked to a new five-year high, the report found, while return on capital plummeted by 15.4 percent.

For businesses all around, debt levels are rising, and the ability to generate new cash flow, the data suggest, has plateaued.

Untapped Opportunities

According to PwC, more than $1 trillion could potentially be unleashed from corporate balance sheets if businesses more adequately address their working capital management strategies.

“The perception that working capital is not a key priority when a company is awash with cash does not hold true, as top working capital performers also have an average of 76 percent more cash-on-hand,” PwC concluded. “Top performers realize that they need cash to enable growth and stay ahead of the competition.”

Cash flow management is key to improving the state of the business climate, researchers said, adding that there are four key factors that impact how well a business can manage their cash flow: industry, regional economic maturity, company size, and the prioritization of cash flow management.

The last of these, PwC said, is most significant. “Too often management turns to banks or investors to fund their working capital rather than finding ways of generating more free cash flows themselves or reducing the funding requirements by becoming more working capital efficient,” the report stated. “This need for cash goes far beyond working capital funding.”

According to Daniel Windaus, the lead author of the report and PwC working capital partner, the most crucial way for businesses to improve their cash flow management is to make it a priority.

“Relative changes in working capital performance aren’t driven by economic cycles or interest rates,” Windaus explained, “but by a cash focused mind-set and a greater focus on smarter working capital management. Cash, after all, is the life blood of all companies.”


Featured PYMNTS Study: 

With eyes on lowering costs to improving cash flow, 85 percent of U.S. firms plan to make real-time payments integral to their operations within three years. However, some firms still feel technical barriers stand in the way. In the January 2020 Making Real-Time Payments A Reality Study, PYMNTS surveyed more than 500 financial executives to examine what it will take to channel RTP interest into real-world adoption. Here’s what we learned.

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