TOTAL WORKING CAPITAL & PROFITABILITY

Unlocking Growth Through Strategic Working Capital Management Improving Corporate Performance and Enhancing Liquidity for Accelerated Business Growth

In today's highly competitive global markets, businesses face increasing pressure to control costs while meeting growing financing demands. As a result, companies are constantly exploring ways to enhance efficiency. While many focus on income and expense management, optimizing the balance sheet can unlock substantial value. One of the most effective methods is active working capital management, which directly improves liquidity and strengthens the company's financial position.

Why Working Capital Management Matters

Active working capital management is a proven strategy to boost enterprise value by optimizing short-term assets and liabilities. By refining processes related to receivables, inventories, and payables, organizations can unlock 20-30% of their working capital, often achieving payback within just a few months.

The Structural Impact of Working Capital Optimization

Working capital optimization goes beyond short-term cash improvements. By addressing fundamental business processes and structures, companies can achieve lasting gains in enterprise value. Integrating working capital strategies with broader cost-saving initiatives can significantly improve profitability.

Effective working capital management drives down inventory management costs, receivables collection, and payables administration. This strengthens liquidity and reduces borrowing needs, reinforcing financial stability.

Benchmarking for Best Practices

While working capital optimization opportunities vary across industries, only 10% of businesses achieve "best-in-class" performance. By benchmarking against industry standards, companies can identify improvement potential.

Industry Working Capital Ratio (WCR) WACC

Automobiles 5 - 15% 7 - 8%

Chemicals 15 - 25% 7 - 8%

Retail 5 - 15% 6 - 7%

Energy 15 - 25% 6 - 7%

Industrial 15 - 25% 6 - 8%

Consumer Goods 15 - 25% 9 - 11%

Key Drivers of Working Capital Management

Effective working capital management requires identifying and addressing the structural drivers influencing cash flow. Common areas for improvement include:

Leveraging Tax Management for Working Capital Efficiency

Effective tax planning can significantly influence working capital outcomes. Indirect taxes, such as VAT and excise duties, often represent 20-30% of revenue, reaching up to 60-70% in specific industries like tobacco, oil, and beverages.

Accelerating input VAT recovery or deferring output VAT payments can improve liquidity by reducing tied-up capital.

The Role of External Expertise in Optimizing Working Capital

Integrating working capital best practices into daily operations requires discipline and expertise. Engaging external consultants can accelerate success by:

• Providing Specialized Knowledge: Consultants bring proven methodologies, industry benchmarks, and best practices to the organization.

• Ensuring Project Momentum: External involvement often drives focus, commitment, and prioritization from internal teams.

• Overcoming Resource Constraints: Consultants fill gaps in data analysis, resource allocation, and project management, ensuring the initiative stays on track.

Proven Three-Stage Working Capital Solution

PwC has a structured, three-stage process designed to deliver measurable improvements in working capital management:

Stage Activities Outcomes Project Start Analysis of processes, benchmarking Identification of reduction potential Implementation Redesign of processes, implementation of quick wins Immediate liquidity improvements Project Closure Monitoring progress, ensuring long-term stability Sustained reduction in working capital

Key Benefits of Optimized Working Capital Management

Effective working capital management offers tangible business benefits, including:

• Additional growth opportunities through freed-up investment capital

• Enhanced operational processes and efficiencies

• Improved profitability through lower capital costs

• Sustainable reduction in working capital needs

• Strengthened liquidity and improved financial stability

Conclusion

Proactive working capital management is a powerful tool for businesses seeking to improve liquidity, reduce costs, and unlock growth potential. Addressing structural inefficiencies while reinforcing long-term stability can help companies achieve rapid financial gains. Implementing these strategies with expert guidance ensures lasting value and competitive advantage.

Blog adapted from: Working Capital Management* PwC Interaméricas