CFA Society Singapore
SINGAPORE (Dec 14): Company size matters when it comes to working capital performance, which, when managed well, could help to improve business performance and revenue growth.
This is according to the Singapore Working Capital Study 2017 jointly conducted by Pricewaterhouse Coopers (PwC) Singapore and SPRING Singapore, which looked at over 1,000 public and private companies across 15 industries in Singapore.
In particular, the study found that very large companies – defined as companies with revenue of more than $500 million – performed the best when managing working capital, with the highest ratio of working capital to sales at only 8%.
Small companies with revenue of less than $10 million follow behind in performance with a ratio of 14%, and large companies, defined as companies booking revenue of more than $100 million but less than $500 million, at 15%.
It is the medium-sized companies with revenue ranging between $10-100 million which appear to be struggling the most in managing their working capital, notes PwC, with the highest ratio at 18%.
The professional services firm attributes this finding to their higher cost of growth, which in turn increases the difficulty faced in accessing funding in favourable rates. This is because medium-sized companies find themselves battling for cash without much negotiating power; while inadequate proficiency in managing a growing business, coupled with lagging tools and systems, can also add to poor performance.
Meanwhile, PwC believes companies classified as “very large” in size have easier access to capital at more attractive rates due to their ability to leverage economies of scale.
This year’s study results found that over the last three years, businesses in Singapore have seen an average 2.6% decrease in revenue on-year, with 50% of sectors having seen their working capital performance deteriorate y-o-y.
Such poor performance was driven by an increase in the time taken to collect cash from sales (Days Sales Outstanding) and an inventory increase (Days Inventory Outstanding), offset in part by an increase in the time to pay creditors (Days Payables Outstanding) that might not be sustainable in the long term, says PwC.
The study also found that companies that have been able to achieve top quartile working capital performance have outperformed their peers across various key metrics, such as achieving higher investment rates by getting paid 40% faster than bottom performers and holding four times less inventory.
Top performers were also found to be better-positioned for growth given their ability to self-finance their investments or secure funds more easily by displaying healthier financial reports.
“Working capital is akin to the lifeblood of a company. Optimising working capital is crucial, as failure to manage it properly can have serious implications on the success of a business – from funding day-to-day operations to its ability to fund growth,” says Wee Tze Wee, Deals Strategy and Operations Partner, PwC Singapore.
On the correlation between company size and working capital performance, Chew Mok Lee, Assistant Chief Executive, Capabilities and Partnership Group, SPRING Singapore, comments: “Cash flow management has consistently surfaced as a challenge in local SMEs and SMEs do need help in this area."
"With this joint benchmarking study with PwC Singapore, SMEs can now see how their working capital performance is against their industry peers, tackle shortcomings in their cash collection cycles, and find ways to improve their financial health for sustainable growth," she adds.