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Managing working capital to unlock value in Retail industry - A framework for retailers to sustain growth

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Like many companies, retail companies need to reward their shareholders. But with 3 out of every 5 retailers exceeding their net income with payments to shareholders via dividend payments and repurchases, managing working capital has become essential to generating a positive impact on cash flow. WNS DecisionPoint™ analyzed the working capital performance of 147 publicly listed retailers from North America and Europe, across nine global sectors for the years 2012 through 2016. Our analysis shows that most retailers have been unable to sustain improvements in their performance so far.

This report looks at why that is and where improvements can be made to working capital management. It looks at 9 retail sectors and examines how Day Sales Outstanding, Days Inventory Outstanding, and Days Payable Outstanding affect the Cash Conversion Cycle of each sector. They reveal trends in each of the 9 sectors and allow us to create a Working Capital Management Playbook.

Discover some of the key strategies in the Working Capital Management Playbook, including:

- Extension of net payment terms: The extension of payment terms with suppliers allows retailers to achieve a longer payables cycle, which can enable companies to hold on to their cash longer.
- Assortment rationalization: Retailers need to optimize their assortments, eliminating products that do not draw crowds or sell well, to achieve higher inventory efficiency.
- Supplier segmentation to allocate payments: Retailers need to place suppliers in different categories in order to optimize the method and terms of payment with each.

To discover the detailed roadmap toward better working capital management, read the full report at
https://www.wnsdecisionpoint.com/our-insights/reports/detail/61/managing-working-capital-to-unlock-value-in-retail

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Managing working capital to unlock value in Retail industry - A framework for retailers to sustain growth

  1. 1. 00 Wnsdecisionpoint.com wnsdecisionpoint.com Managing Working Capital in Retail A Framework for Retailers to Sustain Growth
  2. 2. 11 Wnsdecisionpoint.com Retailers have struggled to improve their working capital performance on a sustainable basis 45.58 44.22 45.89 45.53 45.83 2012 2013 2014 2015 2016 Daysworkingcapital Working capital performance, as measured by the Cash Conversion Cycle (CCC) or Days Working Capital (DWC) 31 27 7 23 21 3 19 12 4 Deterioration Marginal improvement Major improvement Deterioration Marginal improvement Major improvement Workingcapitaperformance in2016vs.2015 Working capital performance in 2015 vs. 2014 19 2 4 4 6 12 20 51 29 WNS DecisionPoint™ analyzed the working capital performance of 147 publicly listed retailers in North America and Europe, across nine global categories (retail sectors).  Retailers have been unable to sustain improvements, as performance has declined by +0.25 days during 2012-2016  Most companies focus on one-time exercises to enhance working capital performance  Once windfall gains from one-time exercise are realized, working capital performance again deteriorates Read full report, to read more about the various facets of sustainable working capital improvement.
  3. 3. 22 Wnsdecisionpoint.com Working capital performance has varied across sub-segments of retail Working capital performance across sectors Categories Δ days (2012 – 2016) Apparel Retail -4.5 Department Stores -0.4 Drug Retail -4.6 E Commerce 8.3 Electronics 4.8 Food Retail -4.1 Home Improvement & Furnishing 9.9 Hypermarkets, General Merchandise Stores -8.9 Specialty Stores 10.9 Performance across sectors has been varied as categories such as apparel, drug retail, food, hypermarkets, supercenters and general merchandise stores have registered significant improvements over the period of analysis To know more about specific characteristics of individual sectors, download report. Operational remarks  Marked polarization exists in working capital performance  Diversified e-tailers such as Amazon are highly efficient in managing their inventory  Specialist e-tailers have struggled to manage inventory as consumer demand weakens  Outperformers & underperformers have an average CCC of -12 & 62 days respectively  Mostly above average performers are large big-box retailers  Most of below average performers are deep-discounters such as dollar stores. Cash Conversion Cycle (CCC) 29.8 17.4 80.3 (68.0) Receivables (DSO) Inventory (DIO) Payables (DPO) Cash Conversion Cycle E Commerce (n=13) Days 16.8 9.4 66.9 (59.5) Receivables (DSO) Inventory (DIO) Payables (DPO) Cash Conversion Cycle Hypermarkets, supercenters, general merchandise (n=18)Days Sector specific structure of CCC (for selected sectors)
  4. 4. 33 Wnsdecisionpoint.com Know your segment and identify the most significant levers of improvement Apparel Department Stores Drug Retail E-commerce Electronics Food Retail Home Improvement and Furnishings Hypermarket and General Merchandise Stores Specialty Retail Retail categories Receivables Inventory Payables  Association levels between CCC and the three levers (receivables, inventory, payables) were arrived at using statistical models  The illustration plots the variable cause-effect relationship between the levers and cash position for each sector  Receivables are not an important aspect in almost all sectors, except electronics (due to institutional sales)  Inventory is the most significant lever for most sectors as seen in the illustration  Drug retailers are another notable exception, as they have significant leverage over suppliers for favorable payment terms  In addition to association levels, financial impact of levers and the improvement also need to be considered There are additional parameters that determine impact and importance of specific components w.r.t CCC, download to know more.
  5. 5. 44 Wnsdecisionpoint.com Leverage analytics to identify major pain points, as inventory and payables will be key pillars of your strategy Retailers can generate USD 2.8 B in additional cash flow based on these improvement initiatives, as per our Business Impact Quantification methodology. Read report to know. Real-time Visibility & Analytics Supplier Segmentation to Allocate Payments Extension of Net Payment Terms Assortment Rationalization 4 Wnsdecisionpoint.com
  6. 6. 55 Wnsdecisionpoint.com A credible insights hub for companies looking to transform their strategies and operations by aligning with todays realities and tomorrow’s disruptions. Email: perspectives@wnsdecisionpoint.com Website: wnsdecisionpoint.com @WNSDecisionPt WNS DecisionPoint WNS DecisionPoint

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