In the last year, treasury management recovered in ways that revealed themes across the entire economy, but the road to permanent recovery might be long. J.P. Morgan’s annual Working Capital Index Report indicates that working capital has rebounded to pre-pandemic levels. However, geopolitical uncertainties, COVID-19 developments, and economic factors could impact the index moving forward. Read on for key trends like ESG and other main takeaways from the 2022 Working Capital Index.
The Working Capital Index returned to pre-pandemic levels after significantly improving from the prior year. Roughly two-thirds of companies also improved Cash Conversion Cycle, which is how many days it takes for them to convert their inventory into cash flows and helps to quantify working capital efficiency. The pharmaceuticals, apparel & accessories, and automotive industries showed the greatest CCC improvement, while aerospace and defense, technology software, and media industries showed deterioration in CCC performance. The Cash Index also improved as S&P 1500 companies increased their spending of cash following a period of holding onto these funds.
$523 Billion: Estimated working capital that can be released across the S&P 1500 companies
Top industries showing
improvement in the CCC in 2021
(number of the days the CCC shortened by)
Top industries showing
deterioration in CCC in 2021
(number of days the CCC lengthened by)
3 Aerospace and Defense
25 Apparel and Accessories
2 Technology Software
68% of companies in the S&P 1500 saw an improvement in CCC of which:
Overall, 8 days fall in CCC and 6 days improvement in DSO
Top four industries with the highest decline in cash levels in 2021:
Highly indebted industries that need special focus on managing their expansion plans and ESG performance:
Working Capital improved 11 points and returned to pre-pandemic levels for two primary reasons:
Cash index improved 6 points as companies more strategically deployed cash into:
Cash Conversion Cycle (CCC) improved 8 days because:
ESG impacts the ability to borrow and financing cost
1. Lower ESG score should result in increase in borrowing cost (instead of reduction)
2. ESG Score ↓, Optimize internal funding and working capital management
How industries are improving ESG scores:
Oil and Gas:
Diversify into clean energy and invest in Carbon Capture and Storage technologies
Shift to electric vehicle production and phase out internal-combustion engine fuel cars
Metals and Mining:
Prioritize operations around mining metals for energy transition and expand into used metals recycling
Supply Chain Diversification:
Companies are preventing future global supply-chain shortages by:
1. Localizing supply chains
3. Diversifying supplier base
4. Digitizing procurement processes
5. Creating buffer stocks of essential components
Tech-Driven Business Models:
AI, IoT Blockchain, and Virtual Reality are unlocking additional revenue streams for corporates and could replace traditional ones.
The pandemic accelerated online shopping, which fostered direct-to-consumer models as companies reached customers with:
1. Omnichannel strategies
2. Marketplace models
3. Renewed loyalty programs
Potential adverse impacts to working capital:
To learn more, please contact your J.P. Morgan representative.
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