Vietnam’s cash to cash cycle (C2C) was around 68 days for fiscal year 2017 (FY17), which was double or higher than most regional and global peers, respectively, according to the latest study from PwC Vietnam, “Cash for growth or growth for cash?”, released on October 31.

The study presents analysis of the past four years for the largest 400 companies by revenue across 14 sectors listed on both the Ho Chi Minh Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX).

According to PwC Vietnam’s working capital performance assessment, there were certain worrying trends about the operation of businesses in Vietnam over the last four years.

The top companies have been growing in line with economic growth, at 6.1 per cent per annum for FY13-17, thanks to a conducive monetary policy and high FDI. However, margins growth has been flat for the same period due to expenses outgrowing revenues. Moreover, there was a deterioration in Return on Capital Employed (ROCE) at companies while financial leverage has increased, with more borrowing to fund capital expenditure.

Stretched cash conversion cycle (C2C)

C2C, the average number of days a company takes to convert resource inputs into cash flows, has increased by six days over the past four years as a result of more working capital used to generate revenue, which was financed through borrowing rather than internal cash release from operational improvements.

Working capital outperformers are most profitable

There is a wide variance in financial performance between top and bottom working capital performers, for which companies who managed their working capital exhibited the best financial metrics. Top performers in FY17 had 12 days of C2C, which is around 20 times lower than the bottom C2C performers, while achieving better solvency, liquidity ratios, and less dependency on outside borrowing to fund day-to-day operations.

Inefficiency at companies in managing receivables and inventory is the reason behind the problem, despite companies’ efforts to delay payments to suppliers to maintain liquidity. In addition, 15 out of the 400 companies studied were able to shorten their C2C while improving their financial performance.

Vietnam’s working capital performance behind most regions

Vietnamese companies are lagging behind in terms of working capital management, by 20-40 days, compared to mature Western markets like the US and Europe and by 15 days compared to their Asian peers, with the lag caused primarily by the Engineering & Construction, Healthcare & Pharma, and Consumer Products sectors.

According to PwC Vietnam’s report, six out of 14 sectors have improved their working capital performance over the last four years. Industries with the greatest improvement were Energy & Utilities, Oil & Gas, and Retail (at 15 per cent per annum), while a significant deterioration was observed in the Technology, Consumer Products, and Metal & Mining sectors (at 10 per cent per annum).

$10 billion cash trapped in net working capital; potential to release up to $4 billion

There is $10 billion in cash still trapped in net working capital. There is, however, the potential to release up to 40 per cent of this total (or $4 billion) if organizations included in the study were to optimize their working capital performance to the top quartile within the sector. In addition, Engineering & Construction, Consumer Products, and Metal & Mining, with the most cash trapped in net working capital, have the greatest prospect for cash release, accounting for almost 50 per cent of the total opportunity.

If past trends continue, companies will require an incremental $2.5 billion or so as cash for working capital and Capital expenditure (Capex), which can be met from cash release by implementing working capital optimization initiatives.

“Inefficient supply chains, the changing landscape of trade and channel practices, and sub-optimal usage of trade financing solutions among organizations are the biggest reasons for Vietnamese businesses lagging behind their regional and global peers in working capital performance,” said Mr. Mohammad Mudasser, Practice Lead, Working Capital Management, at PwC Vietnam.

VN Economic Times