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.
Many companies recovered in 2021
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.
Summary of findings
$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) |
33 Pharmaceuticals |
3 Aerospace and Defense |
25 Apparel and Accessories |
2 Technology Software |
17 Automotive |
2 Media |
- 11 Points Decline in WC Index
- 82 Days Difference in CCC of leaders and laggards
- 6 Points Decline in Cash Index
68% of companies in the S&P 1500 saw an improvement in CCC of which:
- 78% showed shortening of DSO
- 66% showed shortening of DIO
Overall, 8 days fall in CCC and 6 days improvement in DSO
Top four industries with the highest decline in cash levels in 2021:
- Airlines – 7%
- Semiconductor – 5%
- Chemicals – 5%
- Apparel Retail – 3%
Highly indebted industries that need special focus on managing their expansion plans and ESG performance:
- Oil and Gas Upstream
- Airlines
- Oil and Gas Downstream
- Materials
- Quick Service Restaurants
- Ecommerce
- Entertainment
Working capital and cash conversion cycle takeaways
Working Capital improved 11 points and returned to pre-pandemic levels for two primary reasons:
Inventory because:
- Demand (post-pandemic demand increase)
- Supply (Supply-chain disruptions)
Collections because:
- Accounts Receivable (customers made more timely payments)
Cash index improved 6 points as companies more strategically deployed cash into:
- Capital Expenditures
- Shareholder payouts (buybacks and dividends)
- M&A activity
Cash Conversion Cycle (CCC) improved 8 days because:
- DPO decreased 3.7 (payment terms normalized as pandemic-induced liquidity constraints were removed)
- DIO decreased 5.3 (post-pandemic demand and supply-chain disruptions)
- DSO decreased 6.4 (companies used demand recovery to bargain for faster terms)
ESG and working capital
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 -
Automotive:
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
2021 emerging themes:
-
Supply Chain Diversification:
Companies are preventing future global supply-chain shortages by:
1. Localizing supply chains
2. Nearshoring
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.
-
Direct-to-Consumer:
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
Considerations for 2022:
Potential adverse impacts to working capital:
- Geopolitical uncertainties.
- New COVID-19 variants.
- High inflation.
- Federal Reserve monetary policy.
Balancing short-term risks with long-term opportunities:
Short-term risks:
- Inflation: preserve profit margins as input costs rise.
- Interest rate rise: deleverage as cost of capital rises.
- Supply-chain risks: develop agile and resilient supply chains.
Long-term opportunities:
- ESG: streamline operations and work toward ESG targets.
- Recovery-led growth: use capital to support growth plans.
- New-age business models: modify operations amid evolving customer needs.
To learn more, please contact your J.P. Morgan representative.
