Beating the Blues: Manufacturing Industry Working Capital Report 2020 - 2023

Welcome to the economic heartbeat: An analysis of the manufacturing industry's financial landscape.

Let’s dive into the nitty-gritty of how shifts in key financial metrics like revenue, receivables, payables, and the cash cycle are more than just numbers—they’re a glimpse into the broader economic currents. Here’s the scoop:

We’ve dug into the latest figures to give you a clear picture of the ups and downs facing the manufacturing world. Our analysis covers the financials of the biggest names in manufacturing across various sectors—oil & gas, chemicals, electronics/semiconductors, heavy machinery, aerospace, and automotive—all from the Fortune 500 list.

The story these numbers tell is one of resilience amid challenges like inflation, supply chain snags, and a dip in demand. But it’s not all doom and gloom; there’s a silver lining with potential for a gradual comeback. Let’s unpack these insights together!

*Note: For a deeper dive, our report draws on financial data from leading manufacturing firms to sketch out the industry landscape (details at the end).

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

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

While the average revenue grew almost 30% year-over-year for 2021 and 2022, it slumped by 1.5% in 2023. Within the manufacturing sector, the oil & gas sector seems to be the hardest hit in 2023, followed by electronics/semiconductor and chemical industries.

On the other hand, heavy machinery and automobile and aerospace manufacturing companies saw a positive growth in revenues.

While some of the oil & gas heavyweights such as Chevron and Exxon Mobil saw their revenues decrease sharply due to regulatory impairment charges, revenues in the oil and gas industry are expected to remain muted due to a shift to renewable sources and pressure on crude oil supplies.

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The trend in operating cash flows closely paralleled that of revenues, with the oil & gas sector exerting a downward pull on both sets of figures. A decline in product demand due to market slowdown resulted in diminished production volumes and reduced cash generation across the industry.

The graph illustrates the typical growth pattern in revenues and operating cash flow within the manufacturing industry.

Accounts Receivables Drop by 2% YoY

In tune with the drop in revenues and cash from operating activities, average accounts receivables for manufacturing companies also declined in 2023.

Accounts Receivables (AR) saw a nearly 2% decrease in 2023, contrasting sharply with its previous growth of 44% between 2020 to 2022.

Although the manufacturing industry has achieved success in accelerating payment collections over the past four years, the reduction in Accounts Receivables in 2023 can primarily be attributed to the decline in sales.

In absolute figures, the average accounts receivable for manufacturing firms in 2023 stood at $8.2 Bn, a 42% jump from 2020 and approximately a 2% drop from its 2022 values.

Enhanced Quality of Receivables: $3 Mn Decrease in Provision for Credit Losses

While the overall accounts receivable numbers fell, the quality of receivables seems to have improved in 2023 compared to 2022, as 80% of the manufacturing firms reduced their provision for credit losses.

In the last four years, manufacturing firms experienced their highest provision for credit losses in 2022 and 2020, amounting to $197 Mn each. These losses were primarily due to challenges in receivable collection resulting from the Russia-Ukraine war and COVID-19, respectively. The industry’s average provision for credit losses during the period from 2020 to 2023 stood at $191 Mn.

Days Sales Outstanding down by 11 days from 2020 levels

A PwC report on working capital in the manufacturing industry (2017-18) mentions that the industry faces troubles due to a slowdown in the collection of payments from customers.

But in the last four years, the manufacturing industry has streamlined its collections process and tightened its credit policies. The average DSO for the industry fell from 58 days in 2020 to 47 days in 2023.

The localization of supply chains has likely helped lower the DSO levels as collecting payments from vendors within the same geography is easier compared to working with suppliers halfway across the globe.

Accounts Payables increase by 6% YoY in 2023

The manufacturing industry saw its average accounts payable increase by a moderate 6%, to reach $11.2 Bn in 2023. Over the four years, 2020 – 2023, the average accounts payable increased by almost 42% for manufacturing firms (see graph below).

This growth in accounts payables can likely be attributed to the following reasons:

• Investments in new operations: Manufacturing businesses have increased their investments in EV batteries, semiconductors, and metal production.
• Investments in technology and supply chain: Manufacturing companies are also pumping billions of dollars into upgrading their technologies, expanding their production capacity, and controlling and localizing their supply chains.

A Slight Increase In Days Payable Outstanding

As manufacturing units up their investments, they also seem to have been able to get more favourable credit terms from suppliers.

Average DPO increased by 3 days in 2023 YoY, touching 56 days. Over the four-year period, the DSO has more or less remained steady (57 days in 2020, 53 days in 2021 and 2022).

Days Inventory Outstanding increases by 4 days YoY

Another key working capital metric is Days Inventory Outstanding (DIO). Manufacturing companies are seeing an increase in their DIO, meaning that they are having 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 some factors that impacted DIO in the manufacturing industry:

• Slow growth in the semiconductor industry: The semiconductor industry witnessed a significant rise in DIO in 2023, experiencing an 8-day increase YoY. Factors such as sluggish demand, export restrictions, and surplus inventory posed challenges for electronic/semiconductor companies in liquidating their stocks efficiently.
• Supply chain optimization initiatives: Certain sectors such as the oil & gas industry and aerospace companies managed to reduce their DIO figures. Notably, the oil & gas sector saw a reduction of 4 days, while aerospace companies achieved a decrease of 7 days. This improvement in DIO can be attributed to effective supply chain optimization efforts undertaken by these industries.

The Average Cash Conversion Cycle Jumps by 8 days

Cash conversion cycle 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 a similar number, 72 days, in 2020.

Across the sub-industries, an increase in CCC could be noted as the economic climate worsened in 2023.

Future Outlook: Manufacturing Industry Financial Trends 2024

The manufacturing industry ended 2023 in a lull. Revenues and operating cash flow dipped marginally as companies dealt with higher supply chain costs, lower demand, and an uncertain economic environment.

Electronic/semiconductors, oil & gas, and chemical industries continue to remain on shaky grounds, though economists expect output and revenues to grow from March 2024. ISM expects revenues in the manufacturing industry to grow by 5.6% in 2024.

A growth in production and sales will also likely translate into more robust working capital metrics – faster inventory turnover, more favorable credit terms from suppliers, and growth in accounts receivables.

*Note: 30 Top manufacturing companies in oil & gas, chemicals, electronics/semiconductor, automotive, aerospace, and heavy machinery were chosen from this Fortune 500 list. Their SEC filings for 2023, 2022, 2021, and 2020 were analyzed to present the results.