Are you a survivor or

a winner?
Working Capital in the Industrial Products
industry: a key differentiator in managing the
impact of COVID-19

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Contents
Introduction  04
Key Takeaways  05
When Cash is King, Working Capital is Queen  06
Working Capital in the Industrial Products Industry  07
Key Ratios & Figures in Industrial Products, a Deloitte Study  08
Conclusion  10
How Deloitte Can Help You  11
Contact  12

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 Working Capital in Industrial Products

Introduction
In our dynamic world, companies continuously face new challenges and opportunities.
In order to capture these and optimize shareholder value, cash is crucial. Our research
shows evidence that there is a significant untapped potential in working capital
reduction to improve overall cash positions. Given the current COVID-19 times, the
way in which a company manages its working capital will determine whether it merely
survives the crisis or emerges from it as a winner.

By compressing the Cash Conversion Cycle, working capital optimization programs can
deliver funds to the business in a relatively short period of time. This entails setting
up initiatives in trade receivables, trade payables and inventory to achieve operational
excellence in the underlying processes.

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Working Capital in Industrial Products

Key Takeaways

COVID-19: a “perfect storm” leading to • Companies with a significant focus on Companies that succeed in doing so
winners and losers of this crisis. operational excellence and working will gain a key competitive advantage as
capital are much better equipped to faster and better access to funding their
survive the COVID-19 crisis. growth strategy (innovation, M&A, …) will
• Low interest rates and over-optimistic
be the key differentiator in the competitive
business plans have resulted in • With the current uncertain period,
landscape. Time is of the essence.
overleveraged debt situations even operational excellence and working
before COVID-19. capital optimization will remain key areas
to focus on.

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 Working Capital in Industrial Products

When Cash is King, Working

Capital is Queen

The current global economic crisis, Low interest rates have incentivized management as an instrument to strive
often referred to as a liquidity crisis, companies to acquire and invest capex towards operational efficiency. By focusing
is hitting cash positions of companies to build the growth path to their business on pain points in order-to-cash, forecast-to-
hard. Companies with low cash reserves plan. The challenge companies face is fulfill and purchase-to-pay processes, firms
or unstable cash flows have especially that investments have been made on can improve working capital while achieving
appeared to be very vulnerable in the short over-optimistic business plans or business operational excellence at the same time.
term. In order to respond to the sudden plans that are now strongly hit by the global
pressure on liquidity, companies should economic crisis. As a result, EBITDA levels Last, but not least, operational excellence
focus on the Cash Conversion Cycle to are lower than anticipated. Consequently, is an important strategic differentiator in
unlock cash from their working capital. multiple companies are now overleveraged, low-margin industries where cash is king.
’When cash is king, working capital is making working capital optimization a By means of optimizing working capital,
queen’. Businesses with a mature working key element to provide sufficient cash for firms can use proper working capital
capital management have proven to be less sustained growth or even survival. management as an instrument to strive
impacted and more resilient during these towards operational efficiency. By focusing
challenging times. Last, but not least, operational excellence on pain points in order-to-cash, forecast-to-
is an important strategic differentiator in fulfill and purchase-to-pay processes, firms
In addition, many firms have reached a low-margin industries where cash is king. can improve working capital while achieving
point where their debt ratio (i.e. Net Debt/ By means of optimizing working capital, operational excellence at the same time.
EBITDA) is approaching its upper boundary. firms can use proper working capital

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Working Capital in Industrial Products

Working Capital in the Industrial

Products Industry

The Industrial Products industry faces an Moreover, two recent industry trends have putting the Net Debt-to-EBITDA ratio under
inherent challenge in working capital as further increased the importance of a solid pressure. Releasing cash from operations
supply and production-related expenses working capital performance. On the one by compressing the Cash Conversion Cycle
typically require payments significantly hand, rapid developments in innovative through targeted working capital initiatives
earlier than cash collected from sold technologies urge organizations in the can be an alternative source of funds.
goods. More specifically, costs for raw Industrial Products industry to pursue
materials, labor, equipment leases and investments in technologies such as 3D
rent are quickly building up early in the printing to stay ahead of competition.
production process while revenues coming On the other hand, the industry is
from sales are coming in later. In its nature, characterized by increased M&A activity
mature management of working capital can by companies that wish to strengthen
be considered as a strategic differentiator their core business and divest the non-
for the Industrial Products industry. core businesses. Both trends lead to
an increased need for funding thereby

Mature management of working

capital can be considered as a
strategic differentiator for the
Industrial Products industry.

07
 Working Capital in Industrial Products

Key Ratios & Figures in Industrial

Products, a Deloitte Study
Deloitte’s recent study of the Net Debt- the Net Debt-to-EBITDA ratio by 3. The capital in less efficient ways, whilst opting
to-EBITDA, the Working Capital Turnover1 increase in Net Debt is mainly caused by a for more long-term debts as a source for
ratio, and other relevant working capital rise in new debts (payable >1 year) for the funding (see earlier). An untapped potential
measures confirms the above. This study necessary investments. At the same time, of locked cash is thus lying idle within the
examined a representative sample of 30 the reduction of the average EBITDA tells working capital.
companies active in the Industrial Products us that the hope for synergies of recent
industry and headquartered in Belgium M&A activities within the industry are not Table 1 dives deeper into the main
(source figures: consolidated annual taking place as fast as expected and overall components behind the Cash Conversion
reports covering the last two published efficiency in operations is deteriorating. Cycle (DIO2, DPO3 and DSO4), including the
fiscal years). The current economic crisis is expected results per quarter, median and industry
to impact this ratio in two ways. While average. Here, we observe a strong
We should note that these figures do not firms’ Net Debt is likely to increase further, decrease in DPO, indicating that suppliers
yet incorporate the impact of COVID-19. the impact on EBITDA is unclear and request shorter payment terms by 7,5
We therefore describe below the expected firm-dependent. For some firms, EBITDA days on average. This trend is combined
impact of the pandemic on these figures. is under pressure due to a decrease in with a slight build- up in DIO and DSO,
Although the impact strongly depends on turnover. For others, EBITDA might have respectively adding 1,5 days and 1,3 days
the individual characteristics of firms, the increased due to important lower raw on average. Consequently, we find that the
overall impact of the current economic material costs combined with only a slightly Cash Conversion Cycle increased by 10,2
crisis is not likely to lower pressure on reduced demand. days. Taking the different quartiles into
working capital or the Cash Conversion account, we see that the variance within
Cycle. When considering the Working Capital the industry is high. Nevertheless, Table
Turnover ratio, we see that working 1 shows that, even before COVID-19, the
When analyzing Net Debt and EBITDA, capital has increased more (+13%) than industry was struggling to keep its working
we see a sizeable increase in Net Debt the turnover (+3%). These trends result in capital under control.
(+12%) and a decrease in EBITDA (-11%) a ratio decrease from 9.01 to 7.92. In other
over the last fiscal year. Consequently, words, organizations within the Industrial
27% of the firms in our population exceed Products industry used their working

Figure DIO DPO DSO CCC

FY-1 FY-2 FY-1 FY-2 FY-1 FY-2 FY-1 FY-2

Lower quartile 74.2 70.2 50.3 52.4 38.6 39.4 44.0 29.1

Median 91.7 90.2 77.4 82.5 51.6 51.6 93.3 76.3

Upper quartile 132.9 129.7 115.0 100.4 66.2 66.2 114.7 131.5
Average 112.0 110.5 81.5 89.0 56.9 55.6 87.4 77.2

Table 1. Deloitte's Industrial Products industry study results for DIO, DPO, DSO and CCC.

1. Working Capital Turnover ratio = Turnover / Working Capital

2. Days Inventory Outstanding = (Inventory / COGS) * 365
3. Days Payables Outstanding = (Payables / COGS) * 365
4. Days Sales Outstanding = (Receivables / Turnover) * 365
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Working Capital in Industrial Products

Today, the COVID-19 pandemic slows and DSO. On top of this, fluctuations in increased inventories. We can therefore
businesses down (i.e. decrease in turnover) demand have raised and made demand expect the Working Capital Turnover ratio
and puts an increased pressure on Cash less predictable. Here, a phenomenon (resp. Cash Conversion Cycle) to further
Conversion Cycles. Due to the cash-hunt called the ‘bullwhip effect’ comes in play: decrease (resp. increase). In short, working
(see earlier), both ends of the supply chain a small fluctuation in demand on the capital management will be a key leverage
are following-up closely on their payment client side leads to a large fluctuation at in ensuring supply chain resilience.
terms, provoking added stress on DPO the production side. This, in turn, leads to

Working capital management will

be a key leverage in ensuring supply
chain resilience.

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 Working Capital in Industrial Products

Conclusion

The Industrial Products industry is facing Working capital optimization programs are • Decreasing DIO: centralizing inventory
a challenging period where debt funding a straightforward solution as significant management, consolidating vendors,
is reaching unknown heights whilst amounts of cash are hidden in the balance negotiating full drop shipments,
operational margins are under pressure. sheet. By accelerating the Cash Conversion automate inventory-tracking processes,
The hunt for cash in combination with Cycle (increasing DPO, decreasing DSO & etc.
low interest rates has led firms to face DIO), firms can rapidly free up cash. Best • Decreasing DSO: centralizing accounts
increased Net Debt-to-EBITDA ratios. practice strategies include amongst others: receivable processing and reporting,
Today, the tipping point of a healthy debt adopting key performance indicators
position is reaching its upper limit for • Increasing DPO: centralizing accounts (KPIs), developing payment terms
certain companies. On top of this, the payable processing and reporting, together with finance and sales, etc.
COVID-19 crisis adds pressure on the moving towards a paperless processing
liquidity position of firms. Consequently, environment, setting up supplier portals, Furthermore, incorporating a mature
firms should look for alternative ways to adopting more robust governance working capital mindset into the firm’s
free up cash as to enable further growth practices, etc. culture leads to improved operational
and secure necessary investments. excellence and, consequently, helps reduce
pressure on operational margins.

Firms should look for alternative

ways to free up cash as to enable
further growth and secure
necessary investments.

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Working Capital in Industrial Products

How Deloitte Can Help You

Our operational excellence program aims The outcome is an enhanced visibility

at unlocking the hidden cash in working on the working capital performance
capital by speeding up the Cash Conversion and related pain-points, increased
Cycle. We therefore focus on the three core operational efficiency and effectiveness in
processes behind working capital: procure- key processes that drive working capital
to-pay, forecast-to-fulfill and order-to-cash. performance and a cash-minded culture
throughout the entire organization.

Where we play How we play

1. Profile
Working Capital Policy
• Understan working capital approach & archetype
Focus, priorities, etc
• Define WC optimalization strategy & organizational
Purchase-to- Forecast-to- Order-to-Cash model
Pay Fulfill
• Contract
2. Analyze
• Manage • Demand & credit
• Incorporate analytics to identify focus areas for
contracts & planning management
imprvement
suppliers
• S&OP • Order • Quantify the improvement potential ('size the
• Procure goods processing & prize')
• Inventory
& services shipping • Define recommendations to optimize operational
planning
processes
• Receive goods • Invoicing
• Manafacturing
& services 3. Deepdive
• Payment
• Fulfilment • Indentify root causes for suboptimal performance
• Process collection
• Define recommendations to optimize operational
accounts
• Disputes processes
payable
resolution
• Disburse 4. Excel
supplier • Set up a roadmap for improvement
payment • Support in implementing the future state

5. Embed
Culture Performacne • Track and report working capital performance
Organisation, People & Skills Tools & Technology • Establish a culture of working capital excellence

Figure 1. Deloitte’s Working Capital Optimization Model

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 Working Capital in Industrial Products

Contact

Bjorn Borghs Jesse Van Gyseghem Toon Van Assche

Working Capital Expert Working Capital Management Working Capital Management
[email protected] [email protected] [email protected]
+32 (0) 0475 75 42 86 +32 (0) 477 98 68 58 +32 (0) 499 21 51 31

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