Opportunities for cash release from working capital in FY18 will be more than $11 billion in Vietnam, according to the latest findings in PwC Vietnam’s second edition of its annual working capital study - “Cash for growth or growth for cash?”.

The study analyses the working capital performance of the 500 largest listed companies by revenue across 15 sectors over the past four years. The companies analyzed have been listed on both the Ho Chi Minh Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX) for at least the past four years.

“We continue to see cash flows being sacrificed to attain top-line targets in Vietnam, which is not sustainable for businesses in the long run,” said Mr. Mohammad Mudasser, Practice Lead, Working Capital Management at PwC Vietnam. “Managing operating working capital is a cross-functional responsibility, hence the role of CFOs must graduate from pure accounting and controlling to being a more active business partner in achieving the company’s strategic objectives.”

Effective working capital management will additionally support companies’ liquidity needs, which is considered the lifeblood of any business. In recent years, while corporate debts have been constantly on the rise, the amount of trapped cash has also adopted an upwards trend. It is important for businesses to remain cognizant of internal cash release opportunities as it is the cheapest source of liquidity and, in many cases, may be the only source of cash in a harsh credit climate.

According to PwC Vietnam’s assessment, the working capital performance of Vietnamese businesses deteriorated last year and continue to trail behind Asian and global peers.

PwC also witnessed rapid top-line growth of Vietnamese businesses in FY17-18, with revenue growth of over 15 per cent for the companies analyzed. However, margins contracted owing to higher cost of sales and other expenses. As a result, the Return on Capital Employed (ROCE) of the companies continued the downward trend, showing a 6.7 percentage point (ppt) decrease in FY18.

Companies in Vietnam left $24.1 billion on the table as cash trapped in their net working capital in FY18, which accounted for roughly 50 per cent of total net working capital (NWC) and 7 per cent of total annual sales of the companies analyzed, respectively.

Remarkably, one-third of this amount can be realized for the Engineering & Construction and Consumer Products industries alone. In terms of working capital elements, Inventory Days (DIO) was the most important element for companies to focus on for cash release, followed by Receivable Days (DSO).

Working capital performance deteriorated in FY17-18 by two days, reaching 67 days, mainly due to shortening payable cycles. The findings also reveal that working capital needs were mostly financed through short-term borrowings rather than companies looking at opportunities for internal cash release. There was also limited use of payables or receivables financing which can be easier to source financing avenues for compared to traditional bank borrowings.

Fast-growing companies (with sales growth exceeding the median in the past four years) had significantly higher short-term debt growth (with a compound annual growth rate (CAGR) of 13.5 per cent), indicating risks to the sustainable growth of these companies.

Vietnam’s working capital performance continues to lag behind that of most Asian countries, as well as developed markets such as Europe, the US, and Australasia. Vietnam’s C2C was nine days higher than the Asian median and 13 days higher than that of Malaysia. Malaysia, the second-best managed working capital economy in Asia, performed significantly better in inventory (ten days lower DIO) and receivables management (eight days lower DSO) when compared to Vietnam.

Effective working capital management has an important role to play in gaining control over and releasing business’s trapped capital, a valuable resource that is often overlooked. This especially applies to fast-growing companies in Vietnam whose dependency on short-term debt is increasing year-on-year. Along a similar vein, regarding growing concerns for sustainability, the study acknowledges that top working capital performers are best at reducing their C2C cycles, leaving companies in the bottom group far behind.

Besides a significant amount of trapped cash as well as a stretching C2C cycle, the stark gap between revenue growth (15 per cent) and increases in operating profits (3 per cent) further signifies the growing burden of expenses and also implies significant opportunities for working capital improvement in Vietnam. Different metrics of working capital performance in FY18 universally showcase certain limitations of working capital management in Vietnam despite the country’s economic growth. To stay ahead, businesses in Vietnam need to actively manage and maintain their working capital elements to optimize business efficiency and ultimately increase cost savings.