After hitting 10-year highs in 2020, working capital at S&P 1500 companies returned in 2021 to pre-COVID-19 levels as a recovery in the global economy led to an increase in 20% of sales across all businesses, resulting in a reduction in inventory, according to a recent report.
Additionally, corporate cash levels were reduced in 2021 compared to 2020 as companies began to strategically deploy funds after a period of cash preservation, says JP Morgan’s report which analyzes cash flow metrics. working capital of companies listed on the S&P Composite 1500 Index. Companies generally conserve cash in times of crisis or uncertainty to ensure sufficient liquidity.
Meanwhile, $523 billion in cash, the report estimates, remained trapped in the supply chains of S&P 1500 companies at the end of last year, compared to $507 billion in 2020.
“After the shocks to the macro environment as a result of Covid-19, 2021 marked the transition from survival to recovery of the global economy, supported by government stimulus measures, accommodative monetary policy and the deployment effective vaccines worldwide. As a result, we are seeing business working capital returning to pre-pandemic levels,” says Gourang Shah, head of global payments consulting at JP Morgan, who is one of the authors of the report.
“However, 2022 has brought new challenges, including the Ukraine-Russia conflict and rising interest rates, which are further disrupting global supply chains and increasing financing costs,” Shah adds. “A key focus for finance practitioners will be to improve their working capital management to ensure their businesses weather short-term uncertainties.”
Nearly 70% of S&P 1500 companies saw improved working capital efficiency in 2021, the report found, with the pharmaceuticals, apparel and accessories, and automotive sectors among the top performers. improving the most, while the aerospace and defense, technology software, and media sectors were the least optimal.
With a focus on environmental, social and governance (ESG) principles increasingly guiding lender financing decisions, the report also explores the impact of ESG risk ratings on access to external finance across all the sectors. Sectors with lower ESG scores, including oil and gas, airlines, pharmaceuticals and utilities, should prioritize ESG in their strategy and explore internal sources of funding by optimizing the equity fund. turnover and cash management.
“ESG has become a key area of interest for companies from a finance perspective, as the extent to which they are perceived as socially responsible increasingly impacts their ability to access sources of external funding,” Shah points out. “We are seeing companies reassessing their business models, operations and supply chains to improve their ESG scores. Some clear examples are oil and gas companies diversifying into renewables, automakers turning to electric vehicle production, and metal and mining companies turning to recycling.