Singapore firms need to improve on cash management

Businesses need to improve their cash management to mitigate risks, fund their day-to-day operations and finance their growth plans, said PwC Singapore and Spring Singapore.
Businesses need to improve their cash management to mitigate risks, fund their day-to-day operations and finance their growth plans, said PwC Singapore and Spring Singapore. PHOTO: ST FILE

Study shows $8.7b worth of liquidity tied up due to poor working capital performance

Half of Singapore's business sectors need to improve their cash management to free up an additional $8.7 billion of liquidity that is tied up, according to a new study.

It found that the drag in performance was due to a rise in the time taken to collect cash from sales and an increase in inventory.

This was partially offset by an increase in the time to pay creditors - a stance that may not be sustainable in the long term.

The study by PwC Singapore and Spring Singapore, which was released yesterday, looked at more than 1,000 public and private companies across 15 industries.

Seven of these industries managed to improve their net working capital days over last year, two barely maintained their performance, while the other six saw a fall in net working capital days.

The metric measures how long it takes a firm to convert working capital into revenue. The more days it takes, the longer a business is tying up funds without earning a return.

Eight out of 15 sectors have either seen their performance in this regard deteriorate or show signs that they are struggling to maintain their performance compared with last year.

The study identified some sectors that struggle more than others. These include energy and chemicals, which suffered a significant revenue loss of 25 per cent year on year while struggling to manage receivables and inventory. Firms in the sector tried to partially counterbalance their cash constraints by increasing their days to pay creditors.

The offshore and marine sector continues to suffer with 63 per cent of its businesses seeing the performance of their net working capital days deteriorate from 2016.

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 to pay creditors. This positively impacts their net working capital days.

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

Firms with revenue of more than $500 million performed best with the highest ratio of working capital to sales at 8 per cent, followed by those with turnover under $10 million at 14 per cent, and firms with revenue $100 million to $500 million at 15 per cent.

Medium-sized companies - with turnover of $10 million to $100 million - struggle the most in managing their working capital with the highest ratio at 18 per cent.

The study said one reason was the 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," it noted.

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

A version of this article appeared in the print edition of The Straits Times on December 15, 2017, with the headline 'S'pore firms need to improve on cash management'. Print Edition | Subscribe