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- Lengthy working capital cycles affect the ability of businesses to respond to changing market conditions; business leaders need to do more to avoid the risk of falling behind
- Data analytics, automated billing, credit risk management, cross-functional inventory planning and robust governance structures can help strengthen working capital for the longer run
Dubai, United Arab Emirates – According to PwC Middle East’s latest report, working capital optimisation will remain a priority for business leaders in the Middle East, given the region's high cost of capital. However, more can be done to improve working capital management.
Despite businesses in the Middle East demonstrating strong growth, an overall reduction in profitability has been observed for a second consecutive year. The combination of falling oil prices, rising input costs for companies and continuing supply chain disruptions amid geopolitical tensions are all impacting costs. In a challenging interest rate environment, businesses that do not prioritise better working capital management risk falling behind.
The pandemic has prompted a greater focus on both indirect cost and working capital optimisation, a trend expected to continue in 2024. Despite this shift, there are still opportunities for substantial cash release. PwC estimates that as much as $50bn is currently trapped on the balance sheets of listed companies in the form of unused or inefficiently used working capital, costing shareholders up to $5bn of opportunity cost in total to finance, assuming a weighted average cost of capital of 10%.
Commenting on the findings, Mo Farzadi, Business Restructuring Services Leader, said: “In the dynamic economic landscape of the Middle East, effective working capital management is crucial. Optimising working capital not only unlocks significant value and enhances liquidity but also strengthens resilience against market volatility. By focusing on sustainable working capital improvements, businesses can secure their financial stability, support growth initiatives, and pave the way for long-term success.”
Over the coming 12 months, PwC recommends five key actions to be taken by business leaders:
- Strengthening working capital analytics to leverage digital tools and available internal and external data in order to enhance decision making
- Enhancing billing and collection processes to minimise the risk of billing errors causing unnecessary disputes and targeted collection processes
- Optimise credit risk management by leveraging available data and implementing credit risk management practices
- Refining inventory planning and replenishment strategies by implementing cross functional processes to generate and review demand plans
- Establishing a comprehensive working capital governance structure with clear policies, defined roles and responsibilities, KPIs and performance incentives to drive sustainable improvements
Find the full report here.
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Established in the Middle East for 40 years, PwC Middle East has 30 offices across 12 countries in the region with around 11,000 people. (www.pwc.com/me)
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Contact:
Sima Samimi | sima.s.samimi@pwc.com
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