In the past year, Indian companies have gone from a position of having excess cash to battling for the cash to keep their business going.
While cutting down on employees and non-core variable expenses make up an obvious recourse in times of an economic downturn, a closer scrutiny of working capital can offer better solutions. Managed properly, much needed cash tied up in inventories and receivables can be released.
According to a study by consulting firm Booz & Co, a survey of 80 large Indian companies revealed that Rs 3,30,000 crore was blocked in inventory and receivables and about Rs 1,50,000 crore in net working capital.
These companies, spanning auto, cement, chemicals, consumer products, engineering, energy, power and steel sectors, had a profit of Rs 1,30,000 crore at the end of March 2008. So substantial cash can be unlocked.
During the boom period — over the four years ended March 2008 — inventory and receivables increased by 30 per cent per year, while sales increased by 21 per cent. Then capital was abundant and few paid attention to managing cash and inventories, focussing more on top-line growth — maximising output and sales.
Today, there exist significant differences among companies within the same industry. Companies at the bottom have high net working capital in days — 205 in the chemicals sector, 152 in the steel sector, 126 in consumer products and 117 in the auto sector. Cutting them by half can release substantial cash.
“If the companies in the bottom half managed to bring their working capital to the industry average, they could release about Rs 75,000 crore in cash”, said Piyush Doshi, Principal at Booz & Co. “Have cash release targets, manage inventories at a micro level and don’t push too hard on payables (suppliers)”, he advises.