Working capital deteriorates as corporates tighten their belts

16 November 2020 4 min. read

Against a backdrop of uncertainty and economic hardship, the working capital performance of businesses in the Middle East has waned strongly over the past six months. 

A study by the Middle East wing of PwC has found that in the first half of 2020, the average working capital performance deteriorated to 156.7 days. This metric describes how many days it takes for a company to convert its working capital into revenue – in other words, how quickly it can execute the entire procure-to-pay process. The lower the number of days required, the more financially efficient companies are in completing the full cycle. 

The deterioration seen this year is a direct consequence of the current economic climate, according to the authors of the report. This has led to a number of developments including; A fallout of demand for products and services leading to revenue loss, conscious delays or cancellations of payments by companies to protect their balance sheet, and inventory build up – all of which drive down working capital efficiency.

Working capital trends by cycle

The effect has been further compounded in the Gulf by significantly lower oil prices causing a significant decline in government and state-owned enterprise revenues. This, in turn, has led to payment delays to private sector suppliers. 

Illustrating the impact of the development, according to PwC’s calculations, a staggering $9.94 billion (AED 36.5 billion) of cash is now ‘tied up’ in operations by listed companies across the region. The opportunity cost of this cash – the cost of it not being invested elsewhere – runs in the millions for corporates, and tens of millions for larger conglomerates. 

“Economic conditions will most likely remain challenging for the immediate future, therefore the focus on liquidity, including the task of optimising working capital has never been more critical. Organisations will need to act,” said Mo Farzadi, Business Restructuring Services Leader at PwC in the Middle East. 


The first pillar of working capital management, Days Sales Outstanding (DSO), jumped to 189 days in the second quarter of this year, up from 100 days in 2019. “Companies are struggling to enforce their credit policies,” explained Farzadi, adding that in many cases, it is the inevitable result of aggressive cash flow management by finance team seeking to conserve cash.

NWC days by country of originConversely, the average time that Middle East companies took to pay bills and invoices rose sharply from 65 Days Payable Outstanding (DPO) at the end of 2019 to 100 by the end of March 2020, following four years when the average DPO was stable.

Meanwhile, the third pillar of Days Inventory Outstanding (DIO) rose to 107 days by the end of March 2020, and 134 days by the end of June 2020. In comparison, between 2016 and 2019, the average time that companies held goods within their supply chain (from manufacturing to end user delivery) remained unchanged at around 95. 

From a country perspective, there are significant variations in median working capital performance. The region’s largest economy, Saudi Arabia, ranks as the lowest performer, with the shortest DPO cycle and the highest DIO performance. In the UAE and Qatar, net working capital days have been deteriorating since 2015, with a compound annual rise of 12% and 17% respectively. 

Financial coverage

One much used measure to track financial working capital efficiency is Cash on Hand (COH) days – the number of days cash and cash equivalents can cover the total operating and interest expenses. Between 2018 and 2019, average COH fell from 76 to 70 days, and across the two quarters of the pandemic, the number of days dropped further.

Cash On Hand Days trends

Notably, in the early stages of the Covid-19 crisis, the COH days counter-intuitively rose sharply. This was due to the immediate cost cutting measures of companies and decisions not to spend cash reserves. While this bumped up the metric’s performance in the first quarter, it should not mask the deteriorating performance since. 

Further to this, 62% of total COH is held by only 10 companies. If they are taken out of the equation, then average COH days drop to 40 days at the end of 2019, meaning that companies in the region have a worryingly low coverage of less than two months. 

Farzadi: “The road to full recovery is unlikely to be a smooth one and corporates need to be in good shape to fare well on this journey. Industry data in the report shows that, regardless of size and sector, working capital improvements are within a company’s grasp. Companies need to assess their liquidity position and short term outlook swiftly to ensure they don’t lose competitiveness because they lack sufficient cash.”