Working capital requirement hit its worst level since 2012 at 70 days, having deteriorated by +1 day, said credit insurer Euler Hermes recently.
The Working Capital Requirement (WCR) of a company is a financial metric whose components are accounts receivable (also known as DSO for Days Sales Outstanding), inventory (aka DIO for Days Inventory Outstanding) and accounts payable (aka DPO for Days Payable Outstanding), the credit insurance firm pointed out.
According to the firm, WCR is calculated based on following formula: WCR=DSO+DIO-DPO. A rise (drop) in WCR comes either from a higher (lower) DSO, a higher (lower) DIO or from a lower (higher) DPO.
Correction in inventories and stronger discipline in payment needed
“The WCR deterioration mainly comes from the increase in inventories (+3 days), which are currently between 20% and 30% above what is considered a normal level,” said Maxime Lemerle, Head of Sector and Insolvency Research at Euler Hermes.
Companies tried to offset this rise by adjusting their payment behaviors through a decrease of their DSO (-1 day) and an increase in their Days Payable Outstanding (DPO) (+1 day), the company pointed out.
Still, the WCR rise represents US$820 billion or a 12% rise of additional financial resources consumed by working capital in 2018, it added.
“A rise in WCR usually means fewer financial resources for corporates to pursue other objectives such as new product development, geographical expansion, acquisitions, modernization or debt reduction and could therefore lead to an economic slowdown”, Lemerle explained.
In reaction to lower global growth and higher global uncertainty, Euler Hermes expects large corporates to adopt a cautious approach in 2019 and correct their inventories, while showing a stronger discipline in payment.
WCR of large firms expected to decline
Consequently, the WCR of large companies should decline by two days (to 68 days) in 2019, along with a stabilization in value terms to the expected increase in turnover.
WCR rose in three out of five countries including Asia
WCR rose in three out of five countries in 2018, according to Euler Hermes.
The top increases in emerging markets were seen in Brazil (+9 days), South Africa (+8 days) and Chile (+5 days) while deteriorations in Central and Eastern Europe (Russia, Bulgaria) and Asia (India, South Korea and Hong Kong) were also recorded, the firm said.
Several advanced economies also registered an increase in WCR: the Nordics (+4 days), Germany (+3 days), and the US (+1 day), it added.
“For all of those countries, the rise was triggered by an important inventory accumulation (+4 days in average),” Lemerle observed.
Overall, emerging markets tend to have more difficulties than advanced economies when it comes to adjusting their payment behavior to the rise in inventories, he said.
Countries with late payment problems decreased WCR
Countries which managed to stabilize or even decrease their WCR despite the rise in inventories mostly did it through a decrease in DSO, Euler Hermes said.
Surprisingly, Mediterranean countries – Portugal, France and Italy – where companies have a bad habit of getting paid late by their customers and therefore stood out with important increases in DSO in 2018, still managed to decrease their WCR to respectively 57 days (-6 days), 66 days (-1 day) and 70 days (-4 days), the company observed.