Suppliers hit as businesses pass on cashflow pain, report shows

Some of Australia’s largest companies are experiencing cashflow problems due to the economic environment, a McGrathNicol Advisory report shows.

McGrathNicol Advisory partners Sean Wiles and Jason Ireland.

Some of Australia’s largest companies are experiencing cashflow issues due to the tough economic environment, a report has found.

A McGrathNicol Advisory report found the length of the working capital cycle for many firms edged higher in the 2024 financial year. This tied up an additional $754m in cash as inventories fattened up and companies “passed on the pain” by slowing payments to suppliers.

McGrathNicol’s annual Working Capital Report analysed the most recent full-year results and working capital performance of 124 ASX-listed companies with a combined value of $1.15 trillion.

The report found cashflow – a measure of a company’s liquidity and short-term ­financial health – tightened with the average length of Days Working Capital increasing by 0.4 days to 52.5 days.

At the same time average inventories became larger with Days Inventory Outstanding increasing by an average of 3.1 days due to ongoing supply chain costs and reliability concerns, along with variable demand.

McGrathNicol partner Jason Ireland said the half a day added to the working capital cycle represented a small but important increase in what has been a volatile period for businesses.

“I think it reflects the economy in that it was tougher to make a profit in 2024 than the previous year so people turned to try and conserve cash,” he said.

“At a higher level what happened there was it took people longer to collect from their customers – so there’s less cash out there. They had more cash tied up in inventory which has not been sold. And what they did was mitigate that by slowing down how quickly they paid their suppliers, so they are passing on the pain.”

The survey found almost a quarter of sampled companies reported inventory increases by more than 14 days, which placed additional pressure on cashflow, while average Days Sales Outstanding increased by 1.1 days as companies took longer to collect from customers than they had in the previous year.

The report found that to mitigate the cash impact, larger inventory holdings and slower collections from customers, management teams slowed payments to suppliers which resulted in Days Payable Outstanding increasing by 4.3 days.

In fact, all sectors that experienced an increase in average DSO also reported a higher-than-average DPO.

Compared to the international sample, Australian companies collected more quickly from their customers and paid their suppliers faster, but also held more inventory than the US and Asia sample.

Cashflow is a measure of a company’s liquidity and short-term ­financial health. Picture: Leighton Smith.

The 0.4 per cent rise in DWC marked a shift from FY23, where average DWC actually fell 5.6 days to 53.5 days while 12 months previously it increased 5.3 days on average.

Mr Ireland said the volatility was a result of business continuing to ”right size” their inventory levels post Covid.

“Companies are trying to work out what the new normal is and sometimes they get caught with too much inventory and they are needing to slow down the way they pay their suppliers,” he said. “We’re still finding a new level but many of these metrics are coming back to a pre-Covid levels.”

McGrathNicol partner Sean Wiles said the average working capital cycle for companies increased in four of seven sectors, with retail, building products, and food and beverage reporting a decrease. Retail achieved the largest working capital improvement, reducing DWC by 1.9 days to 40.6 days. However, this improvement came from delaying payments to suppliers. Transport and logistics had the largest DWC increase of 2.8 days, driven by higher average inventory levels. Despite this, the sector still had the lowest average DWC at 26.5 days.

Agriculture had an average working capital cycle of 151.7 days, due to the large amounts of inventory many operators hold.

Mr Wiles said in FY24 companies responded to their own working capital and profitability challenges by slowing payments to suppliers. “This can only be a short-term strategy,” he said.

“Management teams who are able to improve collections and optimise inventory and supply chain effectiveness will enjoy a comparative advantage, as well as the long-term benefits of best-practice working capital management – more cash.

“Implementing a formal working capital improvement program for year-round improvement, not just at reporting times, works.”

Originally published as Suppliers hit as businesses pass on cashflow pain, report shows