At the start of 2022, we look back at what most of us hoped to be a “year of recovery” to identify what actually happened in 2021, how it reflected on working capital levels across the corporate environment, and what’s coming up next.


Working capital performance in 2021 has been impacted by global forces (ongoing Covid-19 pandemic and related restrictive measures, disruptions to global supply chains, inflation onset) that have had an overall negative impact, especially on inventory levels.

High-level working capital numbers 2020-2021

In 2020, the cash conversion cycle (CCC) experienced an overall increase, which was led mostly by growing inventories and receivables and was not offset by a modest increase in days payable outstanding (DPO) – the “emergency” reaction of postponing payments to suppliers in an environment where business slowed markedly down. Initial performance numbers reported for 2021 seemed to indicate a much stronger deterioration. In effect, the cash conversion cycle was abruptly on the rise in Europe.

Contrary to what occurred in 2020, Days Sales Outstanding (DSO) decreased slightly in 2021. However, this had little impact compared with the combined effect of decreasing payables and, especially, a strong increase on inventories, which put an additional strain on the cash-generating capacity of many businesses 

Source: Efficio analysis based on financial reports from 1,905 European companies that had published their 2021 results by mid-January 2022

Key elements impacting working capital performance

Certain business priorities took the spotlight in 2021, namely the pressures felt by global supply chains that created disruptions to production lines and to companies’ abilities to manufacture, install, construct, and, in general, meet commitments with their customers. Prominent examples are shortages in semi-conductors or in containers that led to stock-outs of key components, and also the opposite reaction of stockpiling well in advance for fear of missing further deadlines. The consequence of these tensions was both too little and too much stock, derived from imbalances in the portfolio of goods kept in inventory and an overall DIO hike.

This situation has been largely weathered, thanks to a general scenario of low interest rates that have enabled firms to fund cheaply the additional investment in inventories. 

However, dark clouds are gathering on the horizon: inflation, forgotten for several years, reappeared during 2021 and soared in the last quarter to levels unseen in decades. This is partly due to expensive energy prices but also rising costs of raw materials and salaries (necessary to retain key skills in the workforce). This forebodes changes in the monetary policy, and interest rate increases are bound to be a reality sooner rather than later.

This article explores some of the sectors with more visible impact. 

Sector Trends

The aforementioned circumstances do not necessarily have the same impact across all sectors, and they are not spread evenly within the same sector.

For example, transportation is still experiencing a pronounced downturn on the passenger business side while increasing exponentially on the cargo side and leading to severe price increases, which contributes to the overall inflationary pressures.

The charts below provide a detailed view by sector, presenting consecutively their working capital performance in 2021 (Figure 2) and how it changed between 2020 and 2021 (Figure 3).

Deep-dive into performance of selected sectors
Next, we focus on sectors particularly affected in the last two years – highlighted in bold in the charts above – analyzing their working capital trends and indicating what might their direction be in the near future. 

The concluding section sheds light on the potential impact of upcoming interest rates hikes in generating enough cash to pay back debt commitments. It also highlights the key actions that businesses leaders can take to prepare for new challenges ahead.


After a strong slowdown in demand during 2020, the automotive industry’s recovery was especially hard hit by disruptions in its supply chain in 2021 – especially by the semiconductor shortage. This has had a huge impact on production capacity, with longer lead times, a decrease on production output, and lower sales. 

The automotive industry is known for its long CCC and has experienced a steady increase over the last three years, up to 96  days in 2021. This is the result of a drastic increase on DIO, largely caused by missed deliveries due the chip shortages, with half-finished cars sitting on production sites waiting to be completed and delivered to customers and, in some cases, with models delivered with reduced functionality that will have to be reequipped once the proper components become available. 

In this scenario of supply shortages trying to meet a large demand for vehicles coming out of the pandemic crisis, DSO decreased by 13 days, following more stringent payment conditions imposed to customers eager to obtain their cars. 

Conversely, DPO increased by as many as 24 days due to lower cost of goods sold (higher margin as lower or no discounts in offer). Cost of goods sold also improved during the pandemic, as manufacturers used governmental aid and furlough programs to balance reduced production capacity caused by the semi-conductor shortage.

Total debt increased across the industry while cost of capital was reduced at the same time, largely profiting from the low interest rates in the Eurozone, as well as governmental aid.

Some of the automotive companies will start developing their own chips to secure a more reliable supply chain in the future (mid- to long-term). In the short term, it will be key for them to reduce their backlogs of ordered vehicles and ramp up production to meet future demand. The recovery in the short term will be closely linked to resolving current chip shortages.

Construction & Engineering

Construction experienced a negative impact of supply chain disruptions and rapidly increasing raw material prices in 2021, due to shortages of materials such as lumber, steel, and aluminium.

Despite all these challenges, this industry has remained relatively strong during the pandemic compared to other industries as it was able to keep operating under COVID restrictions and saw a quick recovery driven by a private housing boom. Steep price increases were tackled through higher inventory and shorter payment terms and financed by debt increases. 

When looking at the individual working capital elements, DPO generally increased over the last few years, although it reduced significantly in the latest data for 2021.

On the other hand, DIO has remained constant and increased in the latest data available. This underlines the fact that inventory has been ramped up due to supply chain issues, while the cost of goods sold has been slightly decreasing again.

DSO has decreased in the last year after an increase in 2020, following an accounts receivable reduction, while revenues have further increased (11% from 2020). This may indicate that companies have been more efficient in collecting receivables and agreeing shorter payment terms to battle the increasing raw material costs, due to the shortages.

Steep price increases were tackled through higher inventory and shorter payment terms and financed by debt increases. 


The chemicals industry is in the spotlight due to the move towards a greener and more sustainable manufacturing environment – especially in Europe, as a result of EU regulations.

Although the industry has experienced growth in recent times despite negative impacts on the overall economy, chemicals companies will need to make investments in the coming years to ensure they adapt to more stringent regulations, as well as presenting a more “society-friendly” image. Managing working capital may not appear as a top priority for this sector, but the need for extra cash to fund the additional spend required by the industry’s transformation is likely to become an important goal for many companies.

2020 saw a deterioration of up to five days in the cash conversion cycle of European chemical companies. This was due to increases on the asset elements, receivables, and inventories that could not be offset by the longer payment delays imposed on suppliers as a remedial measure – a tactic employed by many companies across multiple industries. 

This deterioration seems to have been reversed during 2021; companies that have started reporting already display a solid CCC improvement of more than 13 days. This is remarkable progress, as it has happened on the back of a serious deterioration in payables (almost halved in the period), most likely a consequence of suppliers becoming less amenable to long payment deadlines in a tight market. It remains to be seen whether the DSO and, even more, DIO reductions are replicated in the bulk of the sector, as they report their 2021 financials. 

There is evidence that part of the inventory decrease is more linked to stock-outs than to a targeted stock rationalization strategy. In the face of an expanding market, this may result in a negative impact and a potential backlash as companies look to replenish their shortages.

Industrial Manufacturing

Industrial manufacturing experienced strong growth and swift recovery in the face of high customer demand through 2021, as compared to 2020. The industry was impacted by supply chain disruptions that increased costs on raw materials and logistics and caused long lead times on components, with lockdowns playing a minor role during this phase of the pandemic. 

Overall, there was an increase on the CCC of 17 days, up to 86 days. Indeed, CCC was impacted by a sharp increase on DIO, a trend that has picked up over the time in the pandemic and reached a new high in 2021. An additional effect of long lead times and shortages of key components was an increase in “WIP inventories”, which remain longer in stock until complex manufacturing processes can be completed and goods delivered to customers.

These delayed deliveries also impacted DSO, which further increased in 2021, after going up in 2020.

These two negative effects have been somewhat compensated by better management of accounts payable, which increased DPO by 12 days.

The latest industry reports and recent outbreaks of the Omicron variant suggest that these trends will continue in 2022 until key supply chain challenges are overcome. We see that debt compared to revenue has increased over the past five years, reaching an all-time high, while interest on total debt has decreased due to governmental aid and the latest European Central Bank (ECB) policies.

Industry growth remains strong, and revenues are set for further growth, also by fulfilling current backlogs. It will be essential to build up a more reliable supply chain, reduce inventory and debt, and benefit from normalisation of shipping and logistic costs.


Pharma always stands near the top with regard to cash conversion cycle. Led mostly by very high inventory levels, this does not seem to have impacted a very profitable industry which, in a pandemic, has seen considerably increased revenues as health concerns become the priority across the globe.

Indeed, pharmaceutical companies in Europe have extended their CCC for three consecutive years, and for as many as 18 days in 2020, the first pandemic year. As expected, this increase was mostly (almost solely) caused by growing inventory days – a normal reaction when the key concern is to stock up to ensure you can meet customers’ increased demands.

Cash-rich businesses can afford these types of investments. Actually, those companies already reporting for 2021 show that this trend of extended CCC is maintained in a year in which normality has far from returned to the healthcare sector.

In such a scenario, inventories have kept going up slightly, but we have also seen also a marked decrease in DPO (a general trend across many sectors, as suppliers’ goodwill diminishes), resulting in an even higher overall cash conversion number of days of 21 days, not compensated by good DSO performance.

Electronic Technology

This is a sector heavily impacted by the ongoing supply chain disruptions, which even pre-date the outbreak of the pandemic. If any industry is subjected to stress in the current times, it is electronic technology. 

During 2020, the sector in Europe experienced a four-day CCC deterioration on the back of increases in receivables and, especially, inventories – and this despite a DPO improvement of 10 days. This increase in inventories was the consequence of companies trying to beef up their safety stock buffers to minimize the impact of electronic components shortages. However, it was not offset by the tolerance that some suppliers displayed throughout the peak of the lockdowns towards payment delays.

This situation kept evolving during 2021.

Companies that have already reported results reveal an overall CCC reduction of six days, which has been (not surprisingly) led by a decrease in DSO. Payables reported show a minor two-day reduction, which hints at the fact that suppliers have become more demanding about faster payments in a market where shortages generate a very competitive scenario and supply tends to have the upper hand.

Moreover, inventories have not significantly changed (less than one day), as a consequence of companies trying to keep buffer stocks to meet demand in a scenario of shortages and stock-outs (which would have a negative impact on revenue and customer dissatisfaction). 

The trend therefore seems to be one in which electronic technology companies are more demanding on their customers to be punctual with their payments and to keep up with the pace of deliveries, which converts into a compounded eight-day decrease in DSO.

Food Products and Services

COVID-related supply chain disruptions and related closures of restaurants and hotels, especially during the winter period of the beginning of the year, were recurring themes in 2021.

Consumers started to return once restaurants reopened, and the industry saw a slow but steady recovery until mid-year. However, labour shortages, logistics chains disruptions, and additional governmental restrictions during Q4 sent another hit to the industry. Despite these limitations, the industry was still able to grow from 2020 levels

In working capital, we see an overall positive industry trend, with CCC declining in 2021. This was primarily caused by decreasing DSO and DIO, by four and 17 days respectively. This signifies that overall inventory was reduced because of uncertainty due to COVID restrictions and an industry in which durability of inventory is critical.

Conversely, DPO decreased by 10 days, mostly due to shorter payment terms required by suppliers to ensure supply of limited amounts of goods. 

Consumer Goods

Consumer goods enjoyed a fast recovery and growth rebound in 2021, even in the face of challenging market conditions, including shortages on semi-conductors (crucial for electronics), increased raw material prices, and disruptions on logistics from Asia to Europe that led to longer delivery times and increased freight costs. 

After an upward move in 2020, CCC improved to 63 days in 2021. This was caused by a relevant DPO increase to 96 days and a DSO decrease to 24 days – almost half that of the previous year, which managed to offset a 15-day hike in inventories as companies piled up stock to face renewed consumer demand.

The increased DPO reflected the increased input costs, while the reduced DSO underpinned the growth of revenue and decrease of accounts receivables. High demand for consumer goods indicates that that the industry could further improve its overall working capital position.

The latest data suggests that these positive trends remained steady through 2021 and are continuing into early 2022.

Hospitality & Leisure

A highly sensitive sector towards any type of uncertainty, hospitality & leisure has been firmly in the pandemic’s crosshairs for two years now.

As the world population was homebound as a result of various lockdown measures taken by countries at one or another time, revenue for companies in this sector took a serious hit in 2020. This, however, did not imply a deterioration in working capital. Let’s examine further.

Overall CCC decreased by three days in 2020, mostly thanks to a seven-day hike in DPO that allowed companies to compensate for increased inventories and delayed collections from troubled customers. This very frequent reaction was tolerated for a while in the face of a difficult pandemic-ridden economic scenario.

However, as societies learn to live with COVID-19 (necessary, as it is still very present across the world with its many variants), consumers go back to spending, and the sector is in a slow recovery mode. This has generated the reverse effect in 2021: companies that have reported their results have lost most of the DPO gains they made in the previous exercise – and it’s no wonder, as suppliers’ goodwill wanes.

Conversely, inventories and receivables have experienced a certain degree of improvement, as goods are consumed by willing, paying customers. The overall result reported up to now is an increase of four days in CCC, which may become a burden for hospitality & leisure, if confirmed as a general trend.


Retail experienced an overall negative impact in 2020, as consumers were homebound for long periods of time all across Europe.

Unlike North America or Asia, where more consolidated online buying patterns allowed retail businesses to compensate for restricted access to physical shops, the combined revenue of Europe’s retail sector decreased by more than 5%, after several years of steady growth.

Contrary to expectations, European retail companies improved their working capital levels in 2020. While inventories remained in place and customers deteriorated their payment patterns, retail companies found margin of maneuver from suppliers that allowed extended payment terms. Generating cash in a year with negative performance was the means of survival for many businesses. 

Companies reporting on their 2021 results displayed a very different picture to the previous year. Business as a whole picked up strongly, benefiting from customers’ willingness to spend the extra savings accrued during lockdown periods. In this scenario, companies decided to invest heavily in high inventories to ensure they could meet customer demand in a disrupted supply chain environment. As a result, CCC experienced a hike of more than 17 days in 2021.

With minimal changes in customers’ and suppliers’ behavior patterns, this increase was almost exclusively DIO-led in the companies for which results are already available. It is very likely that this trend will be replicated as other businesses disclose their 2021 financials.

Provided the current war between Russia and Ukraine does not last for long, the economic growth that occurred in Europe during 2021 is expected to continue.

Some industries appear to be in a strong position, thanks to a number of positive factors. For example, large governmental infrastructure programs will help fuel the construction sector, and high consumer spending and reduced restrictions positively impacted sectors like consumer goods, food products, hospitality, and leisure. 

On the other hand, increased material prices, labour shortages, supply chain disruptions, higher interest rates, and geopolitical tensions are among the key challenges that business sectors will face in the foreseeable future. More agile supply chains will be required to face these challenges without suffering from bloated inventories as a buffer between uncertainty and strong customer demand, which risk becoming obsolete and increase the burden of debt.

Companies should not wait to focus on addressing their weaknesses in working capital management and should attempt to face these uncertain times with a healthy balance sheet and a strong cash generation capability.

A call to action 

  • Re-visit the inventory mix to get rid of slow movers and obsolete items whilst keeping the stocks necessary to satisfy the market demand and protect against supply chain disruptions
  • Strategically manage receivables, ensuring higher-risk customers are proactively taken care of and extended payments are effectively collected
  • When possible, negotiate with suppliers to consolidate extended payment terms defined as a reaction to the pandemic. When not possible, negotiate discounts, as cost of capital is likely to be higher
  • Continue to monitor and update cash flow projections – especially during these turbulent times

Above all, strong cross-functional coordination and improvements in internal processes are key to ensure that a healthy working capital position can be sustained in the longer term.

Upcoming interest rate hikes to put pressure on indebted businesses

Since 2019, there has been a considerable increase in the combined short- and long-term debt of the analysed companies (+49%). Meanwhile, their revenues decreased in 2020 and barely recovered to 2019 levels in 2021, as demonstrated in Figure 4.

Source: Efficio analysis based on financial reports from 1,905 European companies that had published their 2021 results by mid-January 2022

These loans were key to fund increased operational costs and working capital requirements and were enabled by very low interest rates and quantitative easing programs put in place by central banks. Figure 5 below demonstrates how the total percentage of interest costs over total debt decreased by 14% during this period.

Source: Efficio analysis based on financial reports from 1,905 European companies that had published their 2021 results by mid-January 2022.

However, the inflationary pressure in the market is now forcing central banks to increase their interest rates. Subsequently, the interest costs incurred by companies are likely to kick back and put pressure on margins and liquidity. In this context, we recommend that business managers start acting now on measures to generate cash to pay back the debt or at least cover the increased interest costs.

What's next?

Working capital performance is likely to be impacted by similar forces to those in 2021: supply chain disruptions, inflation, Covid-19 related lockdowns (e.g. China), to which we can add the unknown impact of war. In such scenario, companies with efficient cashflow generation capacities derived from good working capital management practices will be better prepared to face these uncertain times