Working capital requirements in 2022

Mind the gap: the USD30trn global liquidity gap is here to stay as payment behaviors likely to deteriorate in 2023

16 March 2023

Executive summary

  • Costly operations. Global Working Capital Requirements (WCR) for listed companies increased by +9 days to 72 days of turnover in 2022 – the largest annual increase since 2008 – following an increase of +3 days in 2021. APAC (+10 days to 77 days of turnover incl. +15 to 59 days in China and +2 in Japan) and Western Europe (+7 days to 68 days) recorded the strongest increases, while North American and CEE firms only registered +6 additional days of WCR. Lower growth, higher inflation, the higher cost of financing and more non-payments explain this rise of WCR. As a result, companies are spending a lot of their financial resources just running the business and less on investment, product development, geographical expansion, acquisitions, modernisation or debt reduction.
  • Pay me later, maybe. Day Sales Outstanding (DSO) and Days Inventories Outstanding (DIO) equally contributed to the annual rise in WCR, increasing by +5 days to 59 and 50 days, respectively, while DPO modestly accelerated (+1 to 36 days). This fast DSO increase means that the number of days it takes a company to receive payment for a sale is increasing and suggests that more companies are and will be experiencing delays in receiving payments, which can result in cash-flow problems. Overall, 17% of companies worldwide are paid after 90 days. Suppliers’ role as the invisible bank is coming back in full force, increasing liquidity risks in the system.
  • Just in time to just in case. Similarly, the physical supply disruptions of 2021 continued to affect corporate balance sheets. The shift from “just-in-time” inventory management to “just-in-case” turned shortages into oversupply. Today, 34% of companies have inventories exceeding 90 days of turnover, with four sectors noticeably most exposed: transport equipment (46%), textiles (39%), electronics (38%) and machinery equipment (36%).
  • In 2023, more of the same. We forecast global WCR to remain broadly stable, both DSO and DPO should increase slightly (+5 combined) while DIO should decrease by about the same. Indeed, in a context of slowing economic activity, oversupply in manufacturing sectors and tightening financial conditions, inventories are likely to decrease while payment delays should increase as in previous economic downturns.
  • Liquidity matters. Looking at the entire universe of companies, well beyond listed companies and including SMEs, our proprietary calculation of the global B2B liquidity gap is expected to remain stable at around USD30trn, with the US and Europe accounting for USD5trn each, and China representing a record USD12trn. In this period of uncertainty, the greatest financial relief we can give small and mid-sized businesses is faster payment of their outstanding invoices, and improved credit-management practices. The trillions tied up in receivables for small and mid-sized businesses worldwide continue to be both an impediment to growth and a major source of credit risk.