Analyzing Trends Shaping Capital Efficiency & Working Capital Management
In the current economic landscape, where market conditions are increasingly volatile and interest rates are higher than they have been in decades, capital efficiency has become a critical focus for companies looking to maintain competitiveness and drive sustainable growth. For capital-intensive industries, optimizing the use of capital is not just a necessity – it is a strategic imperative.
One way of addressing capital efficiency is through working capital. Inefficient working capital management such as keeping excessive amounts of inventory, suboptimal customer and supplier payment terms, and inefficient collection processes can significantly erode profit margins and strain liquidity. Furthermore, elevated interest rates and market volatility not only limit the access to capital but also imply that the cost of keeping capital on the company’s balance sheet becomes significantly more expensive. As the cost of capital remains high, companies should place a greater emphasis on optimizing working capital.
Our analysis of 50 publicly listed Swedish companies reveals that NOWC/Sales has increased by 3.2 pp. from Q4 2019 to Q3 2024, with working capital still elevated compared to pre-pandemic levels.
Change in period 2019 - Q3 2024
Inventory represents the main driver of the heightened NOWC/Sales levels we continue to observe from 2022 and onward. Between 2019 and Q3 2024, the average inventory increased by ~60% and DIO with 21 days. Companies struggle to reduce inventory to pre-pandemic levels.
Accounts receivable also exhibits a sharp increase starting in 2022, increasing 53% from pre-pandemic levels, a development that reflects both inflation and sales growth. However, DSO remains relatively stable, increasing by 6 days between 2019 and Q3 2024. This small increase in DSO suggests that both payment terms and relative share of overdue have remained stable despite increased sales levels.
Accounts payable exhibit similar trends as accounts receivable. Between 2019 and Q3 2024, AP increased by ~60%, and overall DPO levels increased by 12 days. As the issue of bargaining power between large companies and small suppliers have gained attention in recent media debates, companies should avoid overrelying on extending payment term as a strategy to improve working capital.
Our analysis highlights the extended period of elevated working capital levels across industries. Managing working capital should be viewed as a long-term strategic initiative, essential for achieving sustained financial health and profitability. Effective working capital and capital efficiency management requires a structured approach across strategic, tactical and operational level, to ensure that all aspects of the business align towards long-term financial stability and profitability.