Firms need to improve working capital needs, says EY study

A strategic approach needs to be taken towards process improvements to help in time reduction, better customer engagement

Indian companies do not fare well when it comes to managing their working capital. They had Rs 1.8 trillion of cash trapped in their balance sheets at the end of 2016-17, according to an EY study released on Thursday.

Indian companies could improve their working capital position by adopting better practices, the study said.

The report is an analysis of the findings from the working capital performances of the top 500 companies by sales in 2016-17. The rising need for cash has seen a significant increase in short-term borrowings. However, the ability of firms to service debt (interest coverage) has been declining over the years.

In the first half of 2017-18, however, there has been a slight improvement. “Though the study has not gone into much detail for the first half of the current year since an annual comparison is always better, there is an overall improvement of three to four days in the cash conversion cycle. The reason could be that companies are taking longer to pay their suppliers,” said Naveen Tiwari, partner and leader for working capital advisory services, EY India. This was, however, not a healthy way of managing the cash flow, he said, since better relations with suppliers were always more beneficial and could result in discounts and improved margins.

“Further, the recent implementation of the goods and services tax (GST), technological advancements and alternative sources of debt-funding are providing companies with an opportunity to rethink their approaches towards resourcefully managing their working capital,” Tiwari said.

According to him, a strategic and disciplined approach needs to be taken towards process improvements to help in time reduction, better customer engagement and improved vendor relations, since all three have a direct impact on reducing working capital. 

“Technology also plays a key role in driving working capital optimisation in several ways, such as by providing real-time and clearer insights on working capital position and enabling better decision making,” he said.