Keeping pace with a fast-moving economy means continually re-investing profits to fund future growth. Although many companies struggle to access the liquidity needed to enable timely investment, a proactive approach to working capital management can free up significant untapped cash within any business, providing a platform for longer term, sustainable growth.
Our most recent study of companies listed on the Stock Exchange of Thailand (SET) found that these untapped resources add up to an estimated 150 billion Thai baht in potential working capital improvement across all Thai industries. Given the immense importance of cash availability for companies looking to increase revenues, diversify or grow through acquisition, this fundamental inefficiency means that many businesses are feeling the pinch unnecessarily, slowing down their growth efforts or causing them to borrow cash from external sources.
Moreover, other findings in our latest report show that an injection of funds will be necessary for businesses in virtually every sector. By comparing publicly available financial reports from the 2016 and 2017 fiscal years, we find a significant upward trend in the average figures for cash-to-cash days. On the whole, cash-to-cash days (a measure of the cash conversion cycle relative to sales) amounted to 66.8 days in FY16, while increasing to 70 days in FY17, a 4-year high, equivalent to an average working capital requirement of 3.5 billion baht for companies included in the study.
Figure 1: Thailand four-year trend in cash-to-cash days
This addition of 3.2 cash-to-cash days across the companies in our study equates to a demand for an extra 82.9 billion Thai baht of working capital in order to achieve current levels of growth.
These statistics show significant variation, however, between companies and even entire sectors. Telecommunication companies saw the largest deterioration in working capital during the same period, declining from negative 26.2 days to negative 15.8 days. The consumer discretionary sector experienced the largest improvement, reducing its cash-to-cash days by 2% from 67.6 days to 65.9 days.
Overall, the need for additional cash reserves has been driven by an increase of 2.5 days in days sales outstanding (DSO) year on year, typically due to a combination of extended terms and delayed payments by customers. Alongside this change on the customer side is an average decline of 1.2 days in days payable outstanding (DPO) year on year, attributable to businesses paying their suppliers more quickly than in the past. Days inventory outstanding (DIO) has reduced marginally by 0.6 days.
Opportunities across industries
Our analysis showed that working capital availability depends on focused decision-making within a company, and is not limited by business size or industry. The effort to optimise processes to increase working capital tends to be richly rewarded; companies able to make more cash available consistently see far better profit figures than companies that fail to do so.
The difference is often dramatic. Thai companies in the top quartile on this metric have a cash-to-cash cycle that is a full 87 days faster than their counterparts in the bottom quartile. All else being equal, the added speed and capabilities of the former group allows them to manage their operations far more efficiently. The effect is like driving in a fast lane on the highway, versus moving through city streets and pausing at frequent traffic lights. The competitive nature of the race means that a well-managed team will be in much better position to outperform its rivals over time.
Figure 2: Average working capital days by sector, FY17
For businesses in Thailand seeking to be amongst the top performers, we recommend keeping a close eye on opportunities within supply chain optimisation, process automation, and inventory management. Keeping close track of working capital is an essential part of the optimisation process, as is the development of metrics relevant to the sector in which your business operates.
Most of the necessary modifications and adjustments will involve reorienting the internal decision-making process with an eye toward optimising cash and working capital, but can otherwise be made without meaningfully disrupting current operational practices. The real threat of disruption comes from a failure to make the requisite changes, and running out of cash as a consequence.
Even small improvements in working capital availability can make a significant long-term impact on the future stability and growth of your company. By following best practices in the realm of working capital management, your business can begin each cash cycle by looking forward at assertive strategies for growth, rather than looking over your shoulder and settling past debts.
To get your company’s working capital back on the right track, see our previous article on 5 key steps to optimising your cash flows.