Advisory Perfect Timing 2015 Norway Working Capital Survey
Contents Summary What is working capital? Geographic analysis Size analysis Sector analysis Management analysis How we can support you Detailed sector analysis Sample appendix 2
Summary
Norwegian companies have an untapped potential for cash release by improving their working capital levels Norwegian companies have had two consecutive years of working capital improvement, and are even one year ahead of the global trend Norwegian companies are suffering from an imbalance between debtors and creditors, strictly opposite of global figures. This suggests a potential in harmonizing terms DSO 45,2 DPO 27,6 The companies in our analysis have the potential to generate cash equivalent to 7% of their revenue by improving their performance and reaching their own sector s upper 7% of revenue 80% of those who have taken action to improve their operative working capital have experienced improved liquidity 4
What is working capital?
Working capital is the capital tied up in the business to finance its day-to-day operations DWC = DSO + DIO - DPO DAYS WORKING CAPITAL DAYS OF SALES OUTSTANDING DAYS INVENTORY ON HAND DAYS PAYABLES OUTSTANDING DWC is a measure that represents how many days of sales that are tied up to finance dayto-day operations DSO measures how long it takes to receive payments from customers DIO is a way to measure how long it takes to turn the inventory into sales DPO measures how long it takes a company to pay its suppliers 6
Good working capital management can release cash for growth, dividends and refinancing Invest in future growth Pay off debt Unlocking cash within the company is much cheaper than alternatives from investors or banks Good working capital management can release cash and give you the opportunity to invest in future growth Paying dividends will keep the stakeholders satisfied, and the necessary cash could be released through working capital Alternatively, the company can use the cash to pay down debt, which can initially lead to better credit ratings and then lower debt costs and increased profitability Pay dividends to stakeholders 7
There are four factors explaining a firm s working capital level 8
Geographic analysis
2014 represented the first improvement in global working capital following recent years deterioration Global DWC 40,9 41,1 41,3 41,3 40,1 After four years with consecutive DWC deterioration, 2014 showed an improvement. This was mainly due to improvements in DSO and DIO, but a deterioration in DPO diminished the improvement to some extent 2010 2011 2012 2013 2014 Global DSO Global DIO Global DPO 52,2 52,8 52,5 53,2 52,4 58,6 59,1 56,8 57,7 57,4 45,3 45,5 44,3 44,5 43,6 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Source: s 2015 Annual Global Working Capital Survey 10
There are large regional differences in working capital performance 33 38 36 46 64 48 28 Cultural characteristics are reflected in the differences in days working capital across regions of the globe Middle East s relative poor performance is largely due to having the absolute highest DSO Australasia s top performance stems from a beneficial spread between a relatively low DSO and significantly larger DPO, combined with the second lowest DIO among the regions The majority of regions have continued a strong focus on improving inventories. USA/Canada are enjoying a consistently low DIO, while Africa has the highest DIO following a notable deterioration over the last five years Western Economies are the only regions where DPO has deteriorated in the last five years 11
Norwegian companies have had an improvement in DWC, one year prior to the global trend DWC in Norway 48,5 48,6 49,2 50,7 48,9 48,1 Average DWC-levels deteriorated from 2009-2012, but started to improve in 2013, one year earlier than the global trend. In 2014 Norwegian companies are at their best average DWCperformance in 5 years. Both DSO and DIO have improved, while DPO has deteriorated consistently since 2011 DSO in Norway DIO in Norway DPO in Norway 46,3 47,0 46,9 47,0 32,9 33,1 45,6 45,2 31,2 31,4 31,4 30,5 29,0 29,8 30,7 29,3 28,1 27,6 12
Norwegian companies working capital is suffering from an imbalance between debtors and creditors The big difference between DSO and DPO is noticeable, as it suggests that companies get paid by their customers much later than they pay their own suppliers This can indicate that Norwegian companies tie up unnecessarily large amounts of cash in sales outstanding, while they are benefitting their suppliers by paying them early The imbalance suggests that Norwegian companies would benefit from harmonizing their terms DSO 45,2 DPO 27,6 13
Size analysis
Small companies have significantly higher Days Working Capital than large corporations 51 52 50 50 50 51 47 47 45 46 45 42 41 39 39 38 37 We see a significant difference between large, medium and small companies' working capital, with large companies as top performers Small companies reduced the gap in 2013, but an improvement for large companies in 2014 widened the gap again. Large companies have in average 12 days lower days working capital than small companies Despite different yearly development the last five years, working capital levels are almost at the same level in 2014 as in 2009 independent of size Small Medium Large Size is defined through revenue as follows: Small = MNOK 100 500 Medium = MNOK 500 1.000 Large = > MNOK 1.000 15
Larger companies have better DSO and DIO, while smaller companies have better DPO Average DSO Average DIO Average DPO 46 41 37 47 47 48 47 46 44 41 42 37 36 35 36 47 44 36 32 32 30 29 27 33 33 32 32 31 30 31 29 29 27 25 29 26 30 28 27 29 29 28 27 26 25 28 26 Small Medium Large Small Medium Large Small Medium Large Large companies have a better DSO than medium- and small sized companies This can be an indication of bigger companies having a better bargaining power when dealing with customers Small companies in general have a larger DIO than medium- and large companies However, the DIO trend for all sizes have been improving over the last three years Small companies are better at DPO than both large and medium sized companies However, this gap has tightened the last few years 16
By improving to the sector's top performing, companies could release on average 7% of revenue 7 % On average the companies defined as large could potentially release cash equivalent to 7% of their revenue 7 % of revenue 9 % On average the companies defined as medium could potentially release cash equivalent to 9% of their revenue 291 bnok in total, the companies in our survey could potentially generate 291 billion NOK by improving to their own sector s best 9 % On average the companies defined as small could potentially release cash equivalent to 9% of their revenue 17
An average company in the industrial manufacturing sector could potentially release 52 MNOK DWC 60 days 27 days DWC 33 days 52 MNOK in cash - = + Todays performance for an average performing company Improvement to match the best in the sector New net working capital and released cash Input to illustration Basis for calculation Average performing company Sector: Industrial manufacturing Revenue: 700 MNOK Company level: DWC 60 NWC = DWC 365 * Revenue Q1 level in sector: DWC 33 18
Sector analysis
Days working capital varies considerably both between and within sectors 19 21 26 28 36 42 42 48 59 60 68 84 107 186 118 92 79 65 72 52 57 61 50 35 39 31 26 34 23 31 33 17 21 3 4 0 2 10 11 Working capital levels varies significantly among different sectors. In the Norwegian survey Communication has the lowest DWC level while Fisheries has the highest level On global level Pharmaceuticals & life sciences has the highest DWC while Hospitality and leisure has the lowest DWC There is a significant difference between top and bottom performers within all the sectors in both surveys 20
Management analysis
There are four internal factors driving the working capital performance Payment terms Full understanding and transparency of all terms in place, and matched with size and nature of contract Culture and management Accountability and responsibility for working capital management, and top managers involved from a monitoring perspective Monitoring Analysis of operational data to measure terms, policies and procedure compliance and have relevant working capital management KPIs to ensure traceability of operational performance Internal processes Understanding of each end to end process and individual process steps continuously challenged aiming to reduce working capital and maximise cash flow impact 22
We have used a survey to better understand Norwegian companies working capital management The result of the survey consists of 144 respondents All companies have a minimum revenue of 100 MNOK 22% of the respondents have revenues above 1000 MNOK 78% of the respondents are CFOs of their respective companies 23
85% of the respondents have taken action to improve their working capital 52% Increased supplier payment terms 33% Reduced internal billing time of the companies have tried to improve their working capital 85% 33% Reduced customer credit time 65% Reduced inventory stock 24
80% of those who have taken action experienced improved liquidity To a large extent 27% To some extent 51% of the companies have tried to improve their working capital To a small extent 2% No improvement 20% 25
Focus on payables is lower than receivables and inventory in a monitoring perspective 74% 67% 42% % formal reporting Only 42% of the companies in our survey report on payables The focus on inventory and receivables seems to be higher, a bit more than two thirds report on both Receivables Inventory Payables 26
Reporting frequency is considerably higher on receivables than on payables and inventory 49% 14% 18% % reporting daily or weekly 49% report on receivables on a daily or weekly basis, mainly related to their dunning processes It is more common to report on inventory and payables on a monthly basis Receivables Inventory Payables 27
How we can support you
How we can support you 1 Complete 2 Perform 3 Develop 4 Assist a working capital benchmarking exercise to compare performance against peers and identify potential improvement opportunities a diagnostic review to identify quick wins and longer-term working capital improvement opportunities detailed action plans for implementation to generate cash and make sustainable improvements the realisation of sustainable working capital reduction by implementing robust, efficient and collaborative processes Addressing the key factors: Identification, harmonization and improvement of commercial terms Process optimization throughout the end-to-end working capital cycles Process compliance and monitoring Creating and embedding a cash culture within the organization, optimizing the trade-offs between cash, cost and service 29
Examples of areas where could help you to release cash from tied up working capital Accounts receivable Credit risk policies Aligned and optimised customer terms Billing timeliness and quality Contract and milestone management Prioritised and proactive collection procedures Systems-based dispute resolution Dispute root cause elimination Accounts payable Centre Led procurement Consolidated spending Aligned and optimised supplier terms Supply Chain Finance Purchasing channels (to avoid contract leakage) Payment method and frequency Early payment prevention Inventory Lean and agile supply chain strategies Global coordination Forecasting techniques Production planning Accurate tracking of inventory quantities Differentiated inventory levels for different goods Balanced cash, cost and service 30
Detailed sector analysis
Automotive Key figures for 2014 NWC is on average 14% of revenue EBITDA is on average 3% of revenue DWC worst Median DWC best 61 43 31 DWC DSO DIO DPO 51,6 53,7 51,1 19,5 19,2 56,1 57,0 54,2 20,9 21,7 23,8 21,6 20,8 19,7 49,7 48,1 47,7 18,1 18,3 17,7 17,7 51,1 51,7 49,7 The figures above are calculated as an average for the sector 32
Chemicals Key figures for 2014 NWC is on average 20% of revenue EBITDA is on average 14% of revenue DWC worst Median DWC best 79 65 31 DWC DSO DIO DPO 66,3 72,3 61,1 71,3 73,1 59,6 48,1 52,6 48,0 46,0 51,8 43,1 51,2 55,0 51,1 64,0 58,0 47,6 33,0 35,4 37,9 38,8 36,7 31,1 The figures above are calculated as an average for the sector 33
Engineering & construction Key figures for 2014 NWC is on average 17% of revenue EBITDA is on average 8% of revenue DWC worst Median DWC best 72 43 17 DWC DSO DIO DPO 58,9 60,7 60,3 62,6 60,8 59,3 71,6 73,1 73,2 73,8 70,2 72,9 20,5 22,3 23,8 24,5 24,4 23,0 33,2 34,7 36,7 35,7 33,7 36,6 The figures above are calculated as an average for the sector 34
Energy, utilities & mining Key figures for 2014 NWC is on average 8% of revenue EBITDA is on average 27% of revenue DWC worst Median DWC best 52 26 2 DWC DSO DIO DPO 27,0 30,3 24,9 30,9 27,4 27,7 53,8 57,8 47,6 56,2 47,7 50,3 5,4 4,8 5,0 5,9 4,9 5,0 32,2 32,3 27,6 31,3 25,2 27,6 The figures above are calculated as an average for the sector 35
Fisheries Key figures for 2014 NWC is on average 31% of revenue EBITDA is on average 30% of revenue DWC worst Median DWC best 186 139 21 DWC DSO DIO DPO 133,8 107,1 124,8 122,7 112,1 106,9 40,6 40,1 32,9 34,9 41,7 36,8 124,8 99,6 123,0 123,6 99,7 97,1 31,5 32,6 31,0 35,7 29,2 27,1 The figures above are calculated as an average for the sector 36
Industrial manufacturing Key figures for 2014 NWC is on average 18% of revenue EBITDA is on average 7% of revenue DWC worst Median DWC best 92 61 33 DWC DSO DIO DPO 64,7 66,0 65,5 67,7 66,0 68,3 49,2 52,3 52,0 51,6 51,9 49,8 44,0 44,1 46,2 47,1 43,9 47,2 28,5 30,4 32,7 31,0 29,8 28,6 The figures above are calculated as an average for the sector 37
Oil & Gas Key figures for 2014 NWC is on average 7% of revenue EBITDA is on average 15% of revenue DWC worst Median DWC best 26 10 0 DWC DSO DIO DPO 28,5 17,1 18,1 19,1 25,1 26,1 42,6 28,4 37,9 34,0 33,8 38,0 7,5 10,0 7,7 7,8 6,8 8,4 21,5 21,3 27,5 22,7 15,4 20,3 The figures above are calculated as an average for the sector 38
Pharmaceuticals & life sciences Key figures for 2014 NWC is on average 19% of revenue EBITDA is on average 21% of revenue DWC worst Median DWC best 118 68 34 DWC DSO DIO DPO 76,5 73,6 90,8 59,9 69,0 83,7 40,3 42,1 57,9 38,1 44,0 55,8 52,1 55,9 50,5 47,9 60,9 19,6 20,6 23,0 20,2 17,0 21,2 29,6 The figures above are calculated as an average for the sector 39
Retail & consumer Key figures for 2014 NWC is on average 12% of revenue EBITDA is on average 5% of revenue DWC worst Median DWC best 65 34 11 DWC DSO DIO DPO 43,1 44,4 43,8 43,6 42,5 38,2 38,5 39,9 38,8 38,3 34,6 35,3 34,2 34,5 30,1 30,0 30,8 29,2 29,2 41,2 37,1 33,1 33,1 27,7 The figures above are calculated as an average for the sector 40
Technology Key figures for 2014 NWC is on average 11% of revenue EBITDA is on average 12% of revenue DWC worst Median DWC best 57 37 23 DWC DSO DIO DPO 47,4 46,0 48,7 68,9 67,0 70,0 6,9 6,1 4,8 5,7 5,2 5,3 28,4 27,0 23,6 27,0 25,6 25,6 42,0 41,5 41,7 60,8 62,0 62,0 The figures above are calculated as an average for the sector 41
Transportation & logistics Key figures for 2014 NWC is on average 6% of revenue EBITDA is on average 23% of revenue DWC worst Median DWC best 39 19 4 DWC DSO DIO DPO 24,2 20,0 20,4 22,8 21,1 21,2 48,8 46,0 46,3 44,0 3,6 4,3 4,0 3,5 3,4 2,9 28,2 30,3 29,9 24,7 23,5 23,0 41,2 41,3 The figures above are calculated as an average for the sector 42
Communications Key figures for 2014 NWC is on average 4% of revenue EBITDA is on average 18% of revenue DWC worst Median DWC best 35 16 3 DWC DSO DIO DPO 16,5 20,9 22,8 29,1 15,9 19,4 52,5 49,8 56,7 58,2 47,4 49,5 2,8 2,3 2,1 2,9 3,0 2,5 38,9 31,2 36,0 32,0 34,4 32,5 The figures above are calculated as an average for the sector 43
Entertainment & media Key figures for 2014 NWC is on average 9% of revenue EBITDA is on average 10% of revenue DWC worst Median DWC best 50 28 10 DWC DSO DIO DPO 35,8 39,3 37,4 36,7 34,1 36,4 43,3 48,5 46,6 44,8 43,7 45,1 10,5 11,2 9,7 10,0 8,9 7,9 18,0 20,5 19,0 18,2 18,6 16,6 The figures above are calculated as an average for the sector 44
Sample appendix
Basis of calculations and limitations Metric NWC % (Net working capital %) DSO (Days Sales Outstanding DIO (Days Inventory Outstanding) DPO (Days Payables Outstanding) EBITDA Margin (Earnings before interest, taxes, depreciation and amortisation) NWC % measures working capital requirements relative to the size of the company. DSO is a measure of the average number of days that a company takes to collect cash after the sale of goods or services have been delivered. DIO gives an idea of how long it takes for a company to convert its inventory into sales. Generally, the lower (shorter) the DIO, the better. DPO is an indicator of how long a company takes to pay its trade creditors. EBITDA Margin is an indicator of a company's profitability level as a proportion of its revenue. Basis of calculation (Accounts Receivable + Inventories - Accounts Payable) / Sales Accounts Receivable / Sales x 365 Inventories / Sales x 365 Accounts Payable / Sales x 365 EBITDA / Sales Limitations Companies in this survey have been assigned to Norway based on the location of their headquarters. Although a significant part of their sales and purchases are likely to be in Norway, some activities may be overseas and therefore the numbers can reflect payment terms and behaviour in other countries As the research is based on publicly available information, all figures are financial year-end figures. Due to the disproportionate efforts to improve working capital performance towards year-end, the real underlying working capital requirement within reporting periods might be higher Companies with KPI s (DSO, DIO, DPO and DWC) higher than 500 have been removed before the calculations 46
Sampled companies by sector and years Sector Automotive 296 303 306 310 313 221 Chemicals 31 32 34 35 38 17 Communications 35 39 40 40 42 32 Energy, utilities & mining 200 204 204 206 209 153 Engineering & construction 438 454 485 507 545 350 Entertainment & media 100 161 100 98 100 68 Fisheries 81 85 88 91 94 50 Industrial manufacturing 661 676 691 700 708 429 Oil & Gas 28 27 28 25 28 23 Pharmaceuticals & life sciences 6 6 5 6 6 4 Retail & consumer 1079 1119 1152 1192 1228 757 Technology 86 90 97 103 103 72 Transportation & logistics 327 343 362 377 397 213 Total all sectors 3368 3539 3592 3690 3811 2389 *Lower number of companies in 2014 due to late financial releasement date at time of analysis 51
DWC by sector and years Sector Average Automotive 49,7 48,1 51,6 53,7 51,1 47,7 50,4 Chemicals 66,3 72,3 61,1 71,3 73,1 59,6 68,1 Communications 16,5 20,9 22,8 29,1 15,9 19,4 20,9 Energy, utilities & mining 27,0 30,3 24,9 30,9 27,4 27,7 28,1 Engineering & construction 58,9 60,7 60,3 62,6 60,8 59,3 60,5 Entertainment & media 35,8 39,3 37,4 36,7 34,1 36,4 36,6 Fisheries 133,8 107,1 124,8 122,7 112,1 106,9 118,6 Industrial manufacturing 64,7 66,0 65,5 67,7 66,0 68,3 66,3 Oil & Gas 28,5 17,1 18,1 19,1 25,1 26,1 22,3 Pharmaceuticals & life sciences 76,5 73,6 90,8 59,9 69,0 83,7 74,6 Retail & consumer 41,2 43,1 44,4 43,8 43,6 42,5 43,2 Technology 47,4 46,0 42,0 48,7 41,5 41,7 44,6 Transportation & logistics 24,2 20,0 20,4 22,8 21,1 21,2 21,6 Average all sectors 48,5 48,6 49,2 50,7 48,9 48,1 49,1 50
DSO by sector and years Sector Average Automotive 19,5 18,1 19,2 18,3 17,7 17,7 18,4 Chemicals 48,1 52,6 48,0 46,0 51,8 43,1 48,8 Communications 52,5 49,8 56,7 58,2 47,4 49,5 52,4 Energy, utilities & mining 53,8 57,8 47,6 56,2 47,7 50,3 52,3 Engineering & construction 71,6 73,1 73,2 73,8 70,2 72,9 72,4 Entertainment & media 43,3 48,5 46,6 44,8 43,7 45,1 45,4 Fisheries 40,6 40,1 32,9 34,9 41,7 36,8 37,9 Industrial manufacturing 49,2 52,3 52,0 51,6 51,9 49,8 51,2 Oil & Gas 42,6 28,4 37,9 34,0 33,8 38,0 35,8 Pharmaceuticals & life sciences 40,3 42,1 57,9 29,6 38,1 44,0 41,4 Retail & consumer 38,2 38,5 39,9 38,8 38,3 37,1 38,6 Technology 68,9 67,0 60,8 70,0 62,0 62,0 65,2 Transportation & logistics 48,8 46,0 46,3 44,0 41,2 41,3 44,7 Average all sectors 46,3 47,0 46,9 47,0 45,6 45,2 46,4 47
DIO by sector and years Sector Average Automotive 51,1 51,7 56,1 57,0 54,2 49,7 53,5 Chemicals 51,2 55,0 51,1 64,0 58,0 47,6 55,3 Communications 2,8 2,3 2,1 2,9 3,0 2,5 2,6 Energy, utilities & mining 5,4 4,8 5,0 5,9 4,9 5,0 5,2 Engineering & construction 20,5 22,3 23,8 24,5 24,4 23,0 23,2 Entertainment & media 10,5 11,2 9,7 10,0 8,9 7,9 9,8 Fisheries 124,8 99,6 123,0 123,6 99,7 97,1 112,2 Industrial manufacturing 44,0 44,1 46,2 47,1 43,9 47,2 45,3 Oil & Gas 7,5 10,0 7,7 7,8 6,8 8,4 8,0 Pharmaceuticals & life sciences 55,8 52,1 55,9 50,5 47,9 60,9 53,4 Retail & consumer 33,1 34,6 35,3 34,2 34,5 33,1 34,2 Technology 6,9 6,1 4,8 5,7 5,2 5,3 5,7 Transportation & logistics 3,6 4,3 4,0 3,5 3,4 2,9 3,6 Average all sectors 31,2 31,4 32,9 33,1 31,4 30,5 31,8 48
DPO by sector and years Sector Average Automotive 20,9 21,7 23,8 21,6 20,8 19,7 21,5 Chemicals 33,0 35,4 37,9 38,8 36,7 31,1 36,0 Communications 38,9 31,2 36,0 32,0 34,4 32,5 34,2 Energy, utilities & mining 32,2 32,3 27,6 31,3 25,2 27,6 29,4 Engineering & construction 33,2 34,7 36,7 35,7 33,7 36,6 35,0 Entertainment & media 18,0 20,5 19,0 18,2 18,6 16,6 18,6 Fisheries 31,5 32,6 31,0 35,7 29,2 27,1 31,5 Industrial manufacturing 28,5 30,4 32,7 31,0 29,8 28,6 30,3 Oil & Gas 21,5 21,3 27,5 22,7 15,4 20,3 21,5 Pharmaceuticals & life sciences 19,6 20,6 23,0 20,2 17,0 21,2 20,1 Retail & consumer 30,1 30,0 30,8 29,2 29,2 27,7 29,6 Technology 28,4 27,0 23,6 27,0 25,6 25,6 26,2 Transportation & logistics 28,2 30,3 29,9 24,7 23,5 23,0 26,7 Average all sectors 29,0 29,8 30,7 29,3 28,1 27,6 29,2 49
To discuss working capital opportunities with us, please get in touch Thomas Waage Manager thomas.waage@pwc.com +47 91 66 22 62 Jørn Juliussen Partner jorn.juliussen@pwc.com +47 95 26 00 60