Despite healthy economic growth in Latin America, companies there saw a slump in their working capital performance in 2006, according to a new survey by the REL Consultancy Group and CFO.
Reviewing Latin America’s 100 largest public companies, the survey found that days working capital (DWC)— receivables plus inventories less payables divided by daily sales — deteriorated by 2.1 percent in 2006 compared to the previous year.
Minimizing working capital enables a company to maximize its cash flow. The freed cash can be reinvested into the business, promoting growth. In 2006, the net working capital tied up in Latin America-based companies was $50 billion, or about 10.3 percent of sales.
The expansion of Latin America’s days working capital, from 36.9 days in 2005 to 37.6 days in 2006, stemmed from slowing growth in sales, poor forecasting performance, and delays in collecting funds. “They’re not collecting cash as quickly as they should be,” says Karlo Bustos, a financial analyst at REL. In the United States, DWC was 38.8 days in 2006, up from 38.7 in 2005.
The deterioration in 2006 may have been part of a “balancing effect,” according to the report, suggesting that this was to compensate for the good performance the year before. In 2005, Latin American companies improved their DWC 12.9 percent. At the same time, after sales for the top 100 companies grew by 28.8 percent in 2005, such growth slackened off to 18.2 percent in 2006.
The 2006 working capital performance of Latin American companies was the result of a 1.5 percent decline in days sales outstanding (DSO), a 7.9 percent decline in days inventory outstanding (DIO), and a 5.9 percent improvement in days payable outstanding (DPO). “As there are increasing pressures to decrease cost to support income and profitability, some companies are coming back to a balance of payment terms,” the report said, referring to the improvement in DPO.
According to REL, Latin American countries have been hindered by foreign trade partners that are overly reliant on them for cheap supplies and manufacturing. “They need to become more of a strategic partner with the U.S. or other countries, rather than just a low-cost provider,” says Bustos. “They ended up holding more [inventory] at the beginning of the year, which wasn’t benefiting them at all. It really stretched out their working capital.”
REL suggests that if Latin American companies were to improve forecasting and receivables, they could potentially reduce working capital by $46 billion.