Pandemic hits working capital management for companies

The pandemic has impacted the working capital management for companies and stretched top-500 listed companies’ cash cycles by six days, says a report by EY.

In the 12 months ended September 30, 2020, businesses in India saw an increase in the cash-to-cash cycle by 6 days year-on-year. The report said businesses in India have an opportunity to free up to Rs 5.2 lakh crore tied up in working capital, which can help businesses rebound much strongly from the crisis.

The EY study said 69% of companies extended their payables to offset the effects of the pandemic on working capital. It explained that the pandemic-induced lockdowns resulted in increased inventory balances and reduced collections for companies. Prudent companies resorted to the strategy of extending payables in order to manage disruption and preserve cash.

“Large and medium enterprises continue to be more efficient in managing their working capital requirements. Higher bargaining power combined with effective business processes to manage working capital for large businesses resulted in a working capital cycle of 29 days shorter than the small enterprises,” it added. “Nine out of 12 sectors, including metals and mining, oil and gas, and pharmaceuticals observed an increase in days of inventory.”

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The report said that from a sectoral perspective, the power sector has witnessed 34-day deterioration in cash-to-cash cycle, oil and gas by 10 days, and engineering and EPC (engineering, procurement and construction) services by 17 days. “Some sectors like automobiles (13 days), chemicals (12 days) and cement and building products (7 days) have seen an improvement as well.”