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Extra S$8b worth of liquidity tied up due to poor working capital performance: study

The report shows 8 out of 15 sectors, including O&M, are struggling to manage working capital performance y-o-y

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Working capital performance in half of Singapore's business sectors has deteriorated year on year (y-o-y), translating into an additional S$8.7 billion of liquidity tied up, a joint study by PwC Singapore and Spring Singapore has found.

Singapore

WORKING capital performance in half of Singapore's business sectors has deteriorated year on year (y-o-y), translating into an additional S$8.7 billion of liquidity tied up, a joint study by PwC Singapore and Spring Singapore has found.

According to the Singapore Working Capital Study 2017 launched by the two parties on Thursday, the drag in performance was due to an increase in the time taken to collect cash from sales and an inventory increase, partially off-set by an increase in the time to pay creditors that might not be sustainable in the long term.

The working capital study looked at over 1,000 public and private companies across 15 industries in Singapore.

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Of the 15 industries surveyed, seven managed to improve their net working capital (NWC) days y-o-y, two barely maintained their performance, while the remaining six saw their NWC days deteriorate.

NWC days measure the liquidity of a business and how long it takes to convert working capital into revenue. The longer the cycle is, the longer a business is tying up capital in its working capital without earning any return on it.

Eight out of 15 sectors, including offshore & marine, have either seen the performance of their NWC days deteriorate or shown signs of struggles in maintaining their y-o-y performance. Also, 10 out of the 15 sectors registered a loss in revenue y-o-y.

The study identified some sectors that struggle more than others, including energy & chemicals which suffered significant revenue loss of 25 per cent y-o-y while struggling to manage their receivables (+29 per cent y-o-y) and inventory (+38 per cent), and tried to partially counterbalance their cash constraints by increasing their days to pay.

The offshore & marine sector, which has been going through a rough patch the past few years, continues to suffer with 63 per cent of its businesses seeing the performance of their NWC days deteriorate y-o-y.

However, the study said that some of the larger players have helped to substantially improve the sector's overall performance by increasing the amount of time for the company to pay its creditors, thereby positively impacting their NWC days.

Financing difficulties

The businesses studied in Singapore saw a 2.6 per cent decrease in revenue, a y-o-y increase of 1.3 NWC days, and an average increase of 3.5 NWC days over the past three years that "reflects a scenario of increasingly locked-up cash".

In addition, the study found that company size matters when it comes to managing working capital.

Very large companies, with revenues of more than S$500 million, performed best with the highest ratio of working capital to sales at 8 per cent, followed by small companies at 14 per cent and large companies at 15 per cent.

Medium-sized companies, with revenues between S$10 million and S$100 million, struggle the most in managing their working capital with the highest ratio at 18 per cent.

One reason given in the study was higher cost for growth, which increases their difficulty in accessing funding at favourable rates.

"They find themselves battling for cash while having little negotiating power. Inadequate proficiency in managing a growing business coupled with lagging tools and systems can also add to poor performance."

PwC and Spring said that against a backdrop of increasing interest rates and a volatile economic environment, businesses in Singapore need to focus on improving their cash management to mitigate risks, fund their day-to-day operations and finance their growth plans.

The working capital study looked at over 1,000 public and private companies across 15 industries in Singapore.

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