Working Capital Optimisation: how proactively managing your working capital can prevent a decline into zombie status

Poor working capital performance is a strong leading indicator of broader financial decline and zombie status. Getting a grip on your working capital can release an average of over £10m cash from your business - for free - which you can invest in financial resilience and growth.

  • There is an average of over £10m of cash trapped in ‘at risk’ businesses that could be released and invested to reverse their decline
  • There is a strong correlation between underperforming working capital management and ‘at risk’ status - working capital performance of ‘at risk’ companies deteriorated by more than 3x the market average
  • Businesses newly identified as ‘at risk’ in this year’s tracker were already showing a rapid decline in working capital performance in previous years
  • ‘At risk’ businesses took almost six days longer on average to bill and get paid by their customers and held five days more stock
  • Businesses need to focus on their working capital to build financial resilience and avoid becoming a zombie. Proactivity is key!

Our analysis has revealed a worrying trend — a 3.5% rise in mid-market businesses at risk of being or becoming a 'zombie'. These companies are generating just enough profit to keep the lights on and service their debts, but not enough to fuel growth. But can we spot the warning signs early enough to prevent businesses from slipping into this zombie state?

We looked at the correlation between ‘at risk’ status and internal working capital performance - which is the cash used in the day-to-day operations of a business. 

Improving working capital can be a complex process involving reviewing your business’ systems, strategies and supply chains. If you think your company could have trapped cash, get in touch with our specialist working capital team, who will be happy to help. 

There is a strong correlation between poor working capital performance and current zombie status

High inflation, rising interest rates, and geopolitical uncertainty have led to a significant amount of pressure on cash and working capital. The Cash Conversion Cycle, a common measure for the efficiency of working capital, deteriorated by an average of three days for mid-market businesses over the last 3 years. 

During this same period, ‘at risk’ companies identified in the Zombie tracker have deteriorated by 9.4 days – more than 3x the market average – highlighting the correlation between underperforming working capital management and ‘at risk’ status.

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Mining & Quarrying and Real Estate Activities showed the largest delta between industry performance and ‘at risk’ businesses, with both industries improving slightly over the last three years overall, but ‘at risk’ businesses showing a significant deterioration in performance.


Working capital performance can be a strong leading indicator of the future health of the business

Businesses newly classified as ‘at risk’ experienced a slightly larger 9.8 day deterioration over the last three years. Before becoming ‘at risk’, the signs were clear that the decline had begun, as most of this deterioration occurred more than a year ago. Between 2022-2023, industry performance remained flat overall, existing ‘at risk’ businesses deteriorated by 6.4 days, but the new ‘at risk’ businesses were declining more significantly by 8.9 days.


What is driving the decline?

Working capital is comprised of three core areas: sales & customer management, supply chain & inventory management, and supplier & payment management. Analysing each of these paints a similar picture:

Overall mid-market Days Sales Outstanding (the working capital measure for sales & customer management) performance improved by an average of four days over the last three years, whereas ‘at risk’ businesses deteriorated by 1.7 days.

This means that ‘at risk’ businesses took almost six days longer to bill and get paid by their customers.


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The main sectors where there was a significant difference are Technology, Media & Telecoms, Mining & Quarrying and Utilities. Utilities increased by over seven days for ‘at risk’ businesses, versus a reduction of over 10 days for the industry as a whole.

The story is the same for inventory, with Days Inventory On-Hand (the measure for inventory management) improving by an average of almost a day (0.9) for the mid-market as a whole, whereas ‘at risk’ businesses deteriorated by 4 days. This indicates that these ‘at risk’ businesses held five days more stock because they are either struggling to sell their finished goods, have less efficient manufacturing processes, or are required to hold more stock due to their higher levels of supplier pressure.

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Real Estate Activities and once again Utilities were the sectors showing significant deterioration, with Real estate inventory increasing by almost 50% (28 days).

The story is slightly different for Days Payables Outstanding (the measure for supplier & payment management). The market overall reduced by almost 8 days as businesses support their suppliers with quicker payments amidst increased government attention and supply chain disruption. However, for ‘at risk’ companies, DPO only reduced by 3.7 days, indicating a higher level of cash flow pressure and stress on supplier relationships for these businesses.

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‘At risk’ utilities once again showed the biggest gap to overall industry performance, increasing pressure on suppliers by 21 days, versus a reduction of ten days for the industry. Holding onto cash for over a month longer could be driven by the need to offset the deterioration in DSO and DIO performance in the sector. ‘At risk’ businesses in the Hospitality sector actually reduced DPO by 15 days more than the industry as a whole, however this could be driven by added pressure from suppliers to pay more quickly – another sign of a business in trouble.

So, what can businesses do?

Businesses could release an average of £10.5m of cash by focusing on their working capital and improving performance just to the median levels within their industries.

In total, there is £22.4bn of cash trapped within these ‘at risk’ businesses that could be released from their working capital and invested to help them adapt to the market pressures and reverse their decline.

However, this requires concerted effort to focus on working capital management, potentially across processes, capability, culture, systems and commercial strategy. It requires looking at the end-to-end business functions through financial and operational lenses.

Our specialist Working Capital Management team that can help you do just that. For more information, contact Richard Dammermann

Working capital needs to be the responsibility of everyone within the organisation, not just a select few in finance.

 

The working capital measures used

At a high-level, you can understand a business’s working capital performance by analysing their financial statements to calculate Days Sales Outstanding, Days Inventory On-Hand, and Days Payables Outstanding. An overall view of working capital efficiency can be calculated by combining DSO with DIO and deducting DPO, known as the Cash Conversion Cycle. 

These measures can be applied to any business, irrespective of size or level of distress as they are proportional that business’s turnover and costs. They can therefore by used to compare performance across companies and industries.

Key Contacts

Richard Dammermann

Richard Dammermann

Deal Advisory Managing Director - Head of Cash and Working Capital Management
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