Manufacturing Industry Working Capital Report 2020 - 2023

We've analyzed the manufacturing industry's financial landscape, examining data from Fortune 500 giants in sectors like oil & gas and chemicals.

Highlights include a 1.5% revenue dip, a 2% receivables cut, a 6% payables hike, and a 13% increase in the cash cycle.

Despite challenges, how did the sector demonstrate resilience, suggesting a gradual recovery? Let's delve into the details!

Read the full analysis here.

Oil & Gas Sector Drags Down Manufacturing Revenues by 1.5% in 2023 📉

The manufacturing sector suffered significantly from inflationary pressures and recession threats in 2023.

• While average revenue soared by 30% YoY in 2021 - 22, it declined by 1.5% in 2023. 
• The oil & gas, electronics/semiconductors, and chemical sectors took the hardest hits, while heavy machinery, automotive, and aerospace showed growth.
• Despite revenue drops in oil & gas giants like Chevron and Exxon Mobil due to regulatory charges, the industry faces ongoing challenges from renewable energy shifts and crude oil supply constraints.

Operating cash flows mirrored revenue trends, dragged down by the oil & gas sector amid reduced product demand and market slowdowns.

Accounts Receivables Drop by 2% YoY 📊

Average Accounts Receivables (AR) for manufacturing companies declined in 2023 alongside revenue and operating cash flow drops.

• AR saw a nearly 2% decrease in 2023, contrasting sharply with its previous growth of 44% between 2020 - 22.
• Despite progress in accelerating payment collections, the manufacturing industry's reduced AR in 2023 primarily stems from declining sales.
• In 2023, manufacturing firms' average AR totaled $8.2 Bn, marking a 42% increase from 2020 and approximately a 2% decrease from 2022 levels.

To read about the average provision for credit losses for the manufacturing industry, click here.

Days Sales Outstanding down by 11 days from 2020 levels

A PwC report on manufacturing working capital (2017-18) highlights ‘customer payment delays’ as a challenge. 

Over the past four years, the industry has improved its collections process and credit policies. The average Days Sales Outstanding (DSO) dropped from 58 days in 2020 to 47 days in 2023, likely influenced by supply chain localization, simplifying vendor payments within the same region.

Accounts Payables increase by 6% YoY in 2023 💹

In 2023, the manufacturing industry saw a 6% increase in average accounts payable (AP), reaching $11.2 Bn. Over 2020-2023, this figure rose by almost 42%.

This growth can likely be attributed to investments in:

1. New operations like EV batteries, semiconductors, and metal production.
2. Technology and supply chain to expand their production capacity, and control and localize their supply chains.

A Slight Increase In Days Payable Outstanding

Manufacturing investments lead to improved credit terms from suppliers. Days Payable Outstanding (DPO) increased by 3 days in 2023 to 56 days, while DSO remained steady (57 days in 2020, 53 days in 2021 and 2022).

Days Inventory Outstanding increases by 4 days YoY 📦

Manufacturing companies are seeing an increase in their Days Inventory Outstanding (DIO), meaning that they have to hold their inventory for longer before being able to sell it.

The average DIO increased from 68 days in 2020 to 70 days in 2022 and 74 days in 2023.

Here are two factors that impacted DIO in the manufacturing industry:

1. Semiconductor industry's slow growth: DIO rose by 8 days YoY in 2023 due to sluggish demand, export restrictions, and surplus inventory.
2. Supply chain optimization: DIO decreased in sectors like oil & gas and aerospace; Oil & gas was reduced by 4 days, and aerospace by 7 days due to effective supply chain optimization efforts.

The Average Cash Conversion Cycle Jumps by 8 days 🔁

Cash conversion cycle (CCC) is influenced by DIO, DSO, and DPO and gives a picture of how soon companies can convert the money spent on inventory back into cash.

After improving CCC in 2021 and 2022, the average cash conversion cycle jumped back to 70 days in 2023, up from 62 days in 2022. It had touched 72 days, in 2020.

Future Outlook: Manufacturing Industry Financial Trends 2024 🚀

Manufacturing faced a dip in 2023 due to higher supply chain costs and lower demand. 

Industries like electronic/semiconductors, oil & gas, and chemicals are unstable, but economists predict growth from March 2024, with a 5.6% revenue increase forecasted by ISM. 

With production and sales growth expected, working capital metrics are likely to improve, including faster inventory turnover, better supplier credit terms, and increased accounts receivables.

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