We applied the same combination of cash management metrics and our resiliency index to understand how several key industry sectors performed, including advanced manufacturing and mobility; health, science and wellness; technology, media and telecommunications; and consumer products and retail. The results confirmed the overall trends also held true for different sectors and yielded sector-specific insights.
We also see this in our work with clients: it is not enough just to keep operating during a crisis. Companies need to sustain shocks and keep building for the future. When chaos strikes, resilient companies survive; non-adapters often do not.
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Stronger cash management = better operational resilience
Companies with cash-conscious cultures and better cash management are also the most resilient.
As important a quality as resilience is, for companies, it has been a difficult thing to measure and especially difficult to achieve. Fortunately, cash management, or working capital management, is a well-understood and measurable improvement to make. Elements of net working capital are: accounts receivable, measured as days sales outstanding (DSO); accounts payable, or days payables outstanding (DPO); and inventory, or days inventory outstanding (DIO). The benefits include not only better liquidity and financial flexibility, but also operational resilience to withstand downturns.
A cash conscious culture:
- Begins at the top, with appropriate C-level messaging.
- Is embedded in policies, controls and incentives throughout the business that are focused on shortening the cash conversion cycle (CCC) to unlock cash that can be strategically reinvested.
- Enables visibility into the various operations that tie up cash.
- Embeds balance sheet accountability that emphasizes process efficiencies and other cash drivers over short-term incentives.
Companies with weaker cash management abilities are faced with a cycle of constant recovery and have, on average, 26% more quarters of below market performance than their peers, based on total shareholder return (TSR).
Companies neglect resilience for a variety of reasons.
- Typically, the focus on short-term profitability and shareholder pressure for returns can pull attention from objectives, like resilience, that don’t contribute directly to the bottom line and therefore may be seen as non-critical or only “nice to have.”
- Companies may build their strategic plans against a too-rosy forecast of stable conditions or with insufficient attention to operational realities.
- Some companies simply put resilience on a back burner because it is hard to measure, or they may regard resilience as “taken care of” because they have implemented business continuity and disaster recovery plans.
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A new way to compare cash management and resilience
We set out to shed light on how the best-run companies are creating more resilient organizations through better cash management.
We developed an approach to measure organizational resilience, using market data and metrics such as TSR, to establish an overall resiliency score, comprised of measurements in three categories of resilience—prevention, response and recovery. These align with the early, middle and late stages of a given market downturn that is experienced collectively by companies in the overall sample or industry peer group. [Figure 2]
We used this data with recognized indicators of cash management capability, such as CCC efficiency, liquidity ratios and others, to understand how high performers in cash management fare, during a market dip, against their peer group’s average performance in the three resilience measures and overall. We compared high and low cash management performers for an overall, cross-industry view, and broke down the analysis by several industrial sectors, as well. In our index, a lower score (as with CCC) indicates higher performance.
Figure 2. Source: EY-Parthenon analysis.
(For more detail on how we conducted this analysis, please see the Appendix)
Analysis finds working capital performers suffer less volatility in downturns
Prevention
The findings confirm our thesis that companies with better cash management are more resilient, with an average resilience score 19% better than the low performers. The logical expectation is that high performers in cash management should excel in the response and recovery stages by having cash on hand to react to a given market setback. While such companies are indeed better in these categories, a more intriguing finding is the significantly greater preventive advantage demonstrated by companies that excel in cash management. High performers in cash management led low performers by 21%, in prevention, compared with a narrower advantage of just 2% in recovery.
The lesson: while it’s undoubtedly good to have available cash during a crisis, the indirect benefits for the business of superior cash management practices are even more valuable because they help companies limit their exposure to risks in the first place.
This is because the high performer scores are measuring total business health—not only the top and bottom line, but also the balance sheet. The high performers’ leaner business operations gave them better access to credit (as seen in their 23% advantage in credit score), allowing them to experience lower volatility in downturns compared to peers.
Response
Results in the response category demonstrate that companies that are cash efficient are better able to withstand financial downturns, supply shortages and industry-specific challenges, and therefore have more options when downturns occur. This is because their comparatively strong balance sheet, again, enables them to access credit, when needed. For example, a better-managed company can borrow to invest in more inventory to meet a short-term market need, such as a supply shortage or a sudden rise or drop in demand; or a company with cash may be able to afford additional air freight for needed raw materials in an emergency.
The results also indicated that high performers are economically more efficient in the response stage of a given downturn, with higher operating cash flow (OCF) per employee than low performers, on average. These measures help explain their stronger market performance during downturns, where they remained 13% above the poorer cash performers, giving them a 14% advantage in the overall response score.
Stronger cash management performers benefit by being able to absorb business shocks without laying off workers or downsizing. Thus, they are not only more efficient when times are good, they are able to avoid painful choices during downturns.
Recovery
High cash management performers outscored low performers by 5% in the third category, recovery, due to a much stronger rebound (35%) in their operating margin score. This is an indication of the greater profitability of companies with better cash management.
Figure 3. Source: EY-Parthenon analysis.
Figure 3 demonstrates the relationship between cash management and resilience. It plots the 5,000 companies in the data sample based on their cash index and resilience scores, where lower scores indicate higher performers. The companies that are better at cash management are below the line on the chart, and these companies also tend to be grouped at the lower left corner, indicating their higher performance in both cash and resilience.
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Different industries, different impacts
Based on our client experience and analysis, cash management affects resilience in different industries. There are sector-specific considerations to keep in mind.
Figure 4. Source: EY-Parthenon analysis.
Figure 4 shows the comparative performance, against the same criteria as in Figure 3, of companies in four industry sectors that we analyzed: advanced manufacturing and mobility (AM&M); health, science and wellness (HSW); technology, media and telecommunications (TMT); and consumer products and retail (CPR). HSW, which includes hospitals, pharmaceutical and medical device companies, outperforms the other sectors due to their lower inventories, comparatively lower operating cash requirements and less exposure to consumer demand trends. Manufacturers and consumer products companies tend to perform less well overall because of their greater dependence on physical supply chains and inventory and are distributed over a wider area due to their widely varying capital requirements. The results also reflect the greater volatility of manufacturing companies and consumer products companies due to their comparative sensitivity to fluctuations in consumer demand.
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Advanced manufacturing and mobility (AM&M)
High performers in industrial manufacturing have also benefited from sustainable cash programs that have enabled them to fund future-ready business models. In the last four years, high performing companies were 11% better than low performers in the overall resiliency rating. Companies that were able to carefully manage cash performance in the three key areas of days payable outstanding (DPO), days sales outstanding (DSO) and days inventory outstanding (DIO), were also the ones best positioned to adapt to changing economic conditions by reinvesting flexibly.
AM&M overview 
Sector-level analysis:
- The AM&M sector has an average resilience score that is 25% higher than the combined average for all sectors. This shows that the AM&M sector is less resilient than other sectors and is more prone to impacts from a downturn.
- Gains in cash management, for AM&M companies, yield a 10% greater improvement in resilience than similar improvements have for all other sectors, on average.
- AM&M companies that improve from low to high cash performance can improve their raw resilience score by 20%, on average.
Top industries included:
- Transportation manufacturers and distributors
- Industrial conglomerates
- Machinery and electrical systems
- Component manufacturers and suppliers
- Paper and packaging materials
Source: EY-Parthenon analysis
Company example
A manufacturing company has been able to invest in business opportunities as well as its pursuit of carbon-reduction goals after embarking on a five-year program to unlock cash flow. The project identified quick wins that helped realize $40 million in just the first four months. When completed, the highly focused and sustained effort helped unlock $1.5 billion in trapped working capital to help fund strategic investments in future-proofing the business model. The changes included a new cash leadership officer position and team to help drive improvements that impacted resilience, such as enhanced cash-flow forecasting, and a roadmap of working capital opportunities across accounts receivable, accounts payable and inventory.
- The AM&M sector has an average resilience score that is 25% higher than the combined average for all sectors. This shows that the AM&M sector is less resilient than other sectors and is more prone to impacts from a downturn.
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Consumer products and retail (CPR)
Analysis of data from the consumer products and retail sector provides an interesting view of the interplay between payables and inventory management, as critical elements of cash management, and how these are affected when supply chain troubles threaten. Over the last four years, CPR high performers had 74% longer payable schedules and kept inventory on hand for 43% longer than low performers, enabling better prevention and recovery. The data show that CPR companies that fared best through the pandemic and recent supply chain shocks were those that carefully manage both their DPO and DIO as a means of freeing up cash to reinvest.
In normal times, less inventory means shorter DIO, which leads to better overall cash management and more available cash. This becomes complicated when supply chain tie-ups force companies to hold more inventory as security against shortages. To do this, companies need to have both a strong cash position and good supplier relationships. Those that manage the overall supplier relationship effectively are in the best position to prevent and recover from events.
This is because companies that can negotiate longer payment terms with suppliers, by adopting a transparent, communicative approach, for example, are also likely to have preferred customer status, which can be especially valuable when a supply shock hits and they need access to product inputs to increase inventory. This reflects the notion that a rounded approach to cash management generates benefits that add value for the organization in more than just financial ways.
CPR overview 
Sector-level analysis:
- The CPR sector has an average resilience score that is 12% lower than the combined average for all sectors. This shows that the CPR sector is slightly more resilient than other sectors and is less prone to impacts from a downturn.
- CPR companies need to improve cash performance by an additional 20% to achieve the same gain in resilience as compared to all other sectors.
- CPR companies that improve from low to high cash performance can improve their raw resiliency score by 16%, on average.
Top industries included:
- Household and personal care (HPC)
- Hardlines and softlines
- Consumer durables
- Food, restaurants, beverage
- Ag processors
- Tobacco
- Crop protection and seed solutions
Source: EY-Parthenon analysis
Company example
A CPR company undertook an extensive cash management improvement program after a benchmarking exercise showed it was lagging its peers in recovery and prevention capabilities. The company took action to enhance its own DPO and DIO metrics, freeing up $115 million in trapped cash. It used the money to invest in areas that improve resilience, such as improving process efficiencies and funding a program to create a more sustainable and lucrative product line.
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Health science and wellness (HSW)
The analysis showed a different pattern in the healthcare sector, which faced severe strains during the last two years due to shortages of staff and materials and the huge rise in demand during the pandemic. Higher performers differentiated themselves primarily by their ability to respond rather than prevent or recover from downturns. In total, healthcare high performers were 16% better in response compared to low performers and just 9% and 5% better in prevention and recovery, respectively. The results show that high performing healthcare companies were particularly good at using cash effectively to adapt to changing market conditions over the four-year period. A reduction in OCF per employee, a component of the response measure, indicates that high performing healthcare companies were able to hire more healthcare workers to cope with demands from the pandemic.
In our index, high performers in the life sciences sub-sector have significantly better CCC than their lower-performing peers. As a result, over the last four years, life sciences high performers were able to take on more debt and invest in future development and sustainability. For example, high performers spent three times more on research and development as a percentage of revenue, which led, in turn, to better results in preventing downturns, compared to low performers. The other area where better cash management delivered results for life sciences companies was in the ability to invest in inventory when necessary to gain control over supply chain disruptions, which resulted in high cash performers having better responsiveness than lower performing companies.
HSW overview 
Sector-level analysis:
- The HSW sector has an average resilience score that is 70% lower than the combined average for all sectors. This shows that the HSW sector is significantly more resilient than other sectors and is less prone to impacts from a downturn.
- The average HSW company is 3x better at managing cash than the average company, making it more difficult to make marginal improvements. Those that can make cash management improvements are rewarded with an 11% greater gain in resilience than companies in other sectors that make similar improvements, on average.
- HSW companies that improve from low to high cash performance can improve their raw resiliency score by 19%, on average.
Top industries included:
- Medical devices and diagnostics
- Pharmaceuticals and contract Manufacturing
- Biotechnology
- Wholesalers and distribution
- Depts of health/governments
- Health care services
- Non-acute care facilities
- Hospitals and academic health centers
- Health research and testing
- Physician groups
- Health care distributors/vendors
- Health payers, commissioners, health service providers
Source: EY-Parthenon analysis
Company example
A major US pharmaceutical company began a program to get its cash management under control after commissioning a benchmarking report that identified it as a laggard in the sector. The company lacked accountability for important balance sheet accounts, and executive priorities emphasized profit optimization and cost containment more than the overall value chain. EY helped implement a cash leadership office that establishes accountability and executive incentives that balance growth and costs with cash performance measures. Functional management groups oversee continuous process improvement.
The program has delivered $7.4 billion in cash benefits since it began in 2012, by establishing a culture of attentiveness and accountability for cash performance. The greater transparency and stronger inventory management capabilities have had a strong positive effect on corporate resilience by encouraging “out-of-box” thinking about ways to further optimize the supply chain and decrease inventory levels.
Another pharmaceutical client created a cash culture that has delivered $5.2 billion in cash benefits over the past five years. The company set up a cash leadership office to coordinate enterprise-wide cash management changes, including operational metrics to provide visibility and enable prioritization of investment, cash, cost and service. As a result, the company gained financial flexibility to pay dividends, and invest in innovation, acquisitions and improving resilience during the COVID-19 pandemic.
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Technology, media and telecommunications (TMT)
In telecommunications, low cash management performers dropped 4% more in TSR during downturns than high performers. Conversely, high performers were able to ride out market volatility over the past four years by reinvesting in their business at nearly three times the rate of their lower performing peers. This is evident in high performers’ capital expenditure levels—which includes spending on new products, services and acquisitions—which was 8% of sales, on average, compared to 3% spent by low performing companies. This greater ability to invest in their business led to better results in prevention and response, and overall better resilience, during downturns.
TMT overview 
Sector-level analysis:
- The TMT sector has an average resilience score that is 22% lower than the combined average for all sectors. This shows that the TMT sector is more resilient as a whole and less prone to impacts from a downturn.
- TMT companies need to improve cash performance by an additional 11% to achieve the same gain in resilience compared to all other sectors, on average.
- TMT companies that improve from low to high cash performance can improve their raw resiliency score by 18%, on average.
Top industries included:
- Integrated telecommunications
- Satellite, broadcast, cable, OTT networks
- Towers and infrastructure
- Internet and social commerce
- Film and TV studios
- Cable/MVPDs, sports/live/experiential
- Agencies and publishing
- Networking and comms equipment
- Data and information services
- Software, SaaS, apps
- Computers and electronics
Source: EY-Parthenon analysis
Company example
An EY team helped a leading telecommunications company release $100 million in working capital by helping deploy an interim collections system and a new dispute approach for accounts receivable across five business units in North America. Other improvements included automation, collections outsourcing, terms negotiations and enhanced reporting. The initiative improved resilience by creating a sustainable program for continual, long-term cash improvement. It established a collections and dispute management framework, with metrics tracking to monitor and drive improvement to cash position and a balance sheet health. It also created a roadmap of additional order-to-cash initiatives.
Chapter
How to build resilience through a cash-conscious culture
Companies that consistently maintain healthy levels of working capital are in a position of strength when trouble strikes, compared to their peers.
These companies achieve this by adopting a two-part strategy of improving cash performance in the short term with adjustments to processes and measurable metrics, while also making the changes sustainable by building a cash culture to embed new habits and expectations throughout the organization.
Strategic, cross-functional initiatives include:
- A focus on the cash conversion cycle in addition to pricing
- Improvements to long-term cash forecasting and business planning
- Concurrent execution of high-value projects
- Measuring with KPIs
- Holding leaders accountable.
Due to the broad scope of the objectives, including the change in mindset and the reorienting of the entire organization with new management metrics, this can be difficult for companies to do themselves.
The affected functions include finance and treasury, operations, corporate functions, human resources and investor relations. Performance management and incentives need to be linked to cash objectives.
Change management efforts should include consistent messaging and training across departments to explain why cash management matters to them. Success depends on the initiative addressing the whole enterprise, sustainable improvement rather than a one-time focus, and on buy-in from the entire organization, from top management on down.
Companies have made successful cash management transformations by implementing a cash leadership office. A typical CLO is overseen by the CFO and treasurer and includes members from finance, supply chain, procurement and controller to maintain accountability within operations, inventory, accounts payable and accounts receivable.
With a CLO in place, companies can:
- Improve CFO visibility and control over cash flow
- Drive accountability through ongoing reporting
- Challenge the business to identify improvement opportunities
- Coordinate and time-phase actionable plans to optimize cash flow
- Set targets and tracking methodologies with owners and cascade into the organization.
Summary
Companies we’ve worked with to help improve their cash management practices also seem to be the most resilient companies—they are affected later, are impacted less, and recover faster—when markets turn down. Companies can establish a cash leadership office as a first step to leaping past their peers in establishing a culture of cash management, which in turn can lead to a better competitive position in times when supply chain or other disruptions hit the sector.
Carson Bricco of Ernst & Young LLP contributed to this article.
