Canada’s expanding economy and the growing reach of both sales and sourcing helped Canadian firms maintain their strong working capital performance in 2006, according to a new survey by the REL Consultancy Group and CFO.
Reviewing Canada’s 100 largest public companies, the survey found that days working capital (DWC), the sum of receivables and inventories less payables divided by daily sales, deteriorated by 1.6 percent in 2006 compared to the previous year.
Despite the slight expansion to 20.9 days, Canadian companies are still operating with high efficiency. “They are truly managing their working capital to their benefit,” says Karlo Bustos, a financial analyst at REL. By comparison, DWC in the U.S. was 38.8 days in 2006, up from 38.7 in 2005.
Minimizing working capital allows a company to maximize its cash flow. The freed cash can be reinvested into the business, promoting growth.
In 2006, net operating working capital for Canada-based companies was $31 billion, or about 5.7 percent of sales for Canadian companies. Sales in 2006 for the companies surveyed grew by 7.6 percent over the previous year, just less than half the 14.7 percent growth seen in 2005.
While Canadian firms generally manage working capital well, the report notes that there is still substantial room for improvement. “It is surprising that companies have not embraced finding changes to their business model or processes to drive year over year improvements to liberate cash tied up in working capital that can be used to manage strategic initiatives,” the report said.
The working capital performance of Canadian companies were mostly hindered by a 1.4 percent decline in days payable outstanding (DPO). Days sales outstanding (DSO) improved and days inventory outstanding (DIO) held steady. “As there are increasing pressures to decrease cost to support income and profitability, some companies are paying their suppliers quicker to take advantage of early payment discounts,” according to the report. The report found a “true correlation” between the shortened payment terms of Canadian manufacturers and other consuming firms, and the shorter days outstanding for receivables experienced by their suppliers.
While DPO was the only one of the three working capital elements to show deterioration, Canadian firms have room for improvement in their inventories, says REL. “I would suspect they are actually buying more at cheaper prices, that’s why inventory levels haven’t moved,” Bustos says. Moreover, he says, companies need to collect cash more quickly so that it does not linger on their balance sheets. Indeed, says Bustos, were Canadian companies to tackle both inventories and receivables, they could potentially reduce DWC by $25 billion.