Up to $78 billion of excess cash is unnecessarily tied up in working capital processes among the largest Indian companies, according to ‘All Tied Up India 2012’ a new report by Ernst and Young. This is equivalent to about 11 per cent of their aggregate sales.
The report comprising the working capital performance of 400 leading companies in India is Ernst & Young’s first ever Indian publication. Working capital is the net investment in the operating cycle of the firm and defined as the difference between the current assets (trade debtors and inventories) and current liabilities (trade creditors).
In FY12, compared with FY11, the largest companies in India reported a significant deterioration in the working capital performance. Cash-to-cash (C2C) or the average number of days for profit to be converted to cash has increased by 5 per cent against the background of a continuing and rapid growth in sales, increased inflation and interest rates, and heightened volatility in currency and commodity prices.
The findings indicate that since 2009, the C2C of Indian companies has increased by as much as 30 per cent. Had the oil and gas industry been excluded from our calculations, the C2C would have increased by 21 per cent. In comparison since 2008, the US and Europe have reported a reduction in their C2C (excluding the oil and gas industry) of 6 per cent and 4 per cent, respectively. These results indicate that domestic companies have been significantly underperforming in comparison to their US and European peers in the last four years.
In addition, the analysis reveals that among the US, European, Japanese and Asian companies, Indian organizations are at the bottom of C2C performance. While these performance gaps may be partly explained by variations in market characteristics, payment practices and supply chain infrastructures, they also highlight fundamental differences in the degree of management focus on cash and the effectiveness of working capital management processes.
Ankur Bhandari, Partner Working Capital Advisory Services Ernst &Young says, “Overall, the report raises the question whether Indian companies should be paying more attention to their working capital management while shaping and executing their sales and growth strategies. Indian companies need to start viewing working capital as an operational issue and not just as a financial issue. Otherwise, in today’s global market place we will be at a competitive disadvantage.”