2024 Middle East Working Capital Study

Transforming Middle East business resilience: Unlocking value through strategic working capital management

Executive summary

Middle East businesses demonstrated strong growth in 2023, with a combined revenue increase of 6.2% year-on-year (see Figure 1). This robust performance was largely driven by the energy sector and continued strategic investment focused on the UAE and the Kingdom of Saudi Arabia by private equity and sovereign wealth funds. Reflecting this positive market landscape, 73% of Middle East respondents in our latest 2024 CEO survey expect the region’s growth to continue.

In fact the region’s M&A market also recorded remarkable resilience, as seen in our 2024 TransAct Middle East report, leading to a relatively active deal market compared to other regions that have been more susceptible to higher interest rates and recessionary fears.

Based on the latest results, our study highlights some key findings noticed across 450 publicly-listed and private companies and covers five years of key working capital trends from 2019 to 2023, using data sourced from Capital IQ and analysed by PwC.

Key Findings:

“In the dynamic economic landscape of the Middle East, effective working capital management is crucial. Optimising working capital not only unlocks significant value and enhances liquidity but also strengthens resilience against market volatility. By focusing on sustainable working capital improvements, businesses can secure their financial stability, support growth initiatives, and pave the way for long-term success.”

Mo Farzadi
Business Restructuring Services Leader,
PwC Middle East

Working capital trends

Average working capital performance, measured as Net Working Capital (NWC) days, improved from 121 days in 2020 to 108 days in 2022, as companies increased efficiency across all working capital cycles.

However, this trend was slightly undermined in 2023, with an average year-on-year slight deterioration in NWC days across the survey of 0.5 days. Small positive and negative movements were observed across the main cycles.

The improvement in NWC days since 2020 is primarily due to a reduction in the average DSO). In 2023, DSO improved again by 0.7 days year-on-year, but this was offset by a reduction of 1 day in the DPO. The average inventory performance or DIO remained largely unchanged in 2023.

Despite this trend, the average short-term to long-term debt ratio across the study is still above pre-pandemic levels. The key to reducing the short-term debt burden is to improve the overall efficiency of the working capital cycle to reduce the dependency on external financing. Cash released as well as the associated debt financing costs eliminated, could be used in turn to provide returns to shareholders or to reinvest in the company.

The average overall working capital performance of companies deteriorated slightly by 0.5 days in 2023. Meanwhile, the underlying movements in the three working capital cycles were as follows:

DSO improved by 0.7 days
DPO dropped by 1 day
DIO rose by 0.5 days

In recent years, a key focus for most corporations has been their DSO performance, as they have looked to accelerate collections and reduce the risk of bad debts. Based on our interactions in the market, businesses have resorted to both short-term tactics and internal transformations of processes, focused on credit risk and cash collection and have leveraged technologies to enable efficiencies across various processes such as billing, collections and dispute management. More mature businesses have also utilised financing products for their private receivables, though primarily on an as-needed basis.

This year’s study continues the trend of previous years, with very large companies on average turning over cash in their working capital cycle more than twice as fast as their small and medium peer.

Large companies recorded the best overall improvement in average NWC days in 2023, due to a year-on-year decrease of three days in both DSO and DIO, and a year-on-year increase of two days in DPO. This improvement continues a five-year trend beginning in 2019, with large companies placing a greater focus on efficient working capital management as a way to improve their balance sheet in a challenging debt market.

Medium companies saw a year-on-year increase of 4 days in NWC days, largely driven by a longer average DIO cycle, due to supply chain disruptions prompting the accumulation of buffer stock as well as a less efficient supply chain with the second longest DIO cycle. This segment continues to lag behind, with the slowest DSO cycle and the fastest DPO cycle.

By contrast, smaller companies managed a slight one-day year-on-year improvement in their working capital efficiency, continuing a positive five-year trend since 2019. Their performance demonstrates that despite their size, smaller companies can achieve sustainable working capital efficiency by focusing on internal controls and optimising systems and processes.

Saudi Arabia continues to have the longest working capital cycle in the region, despite its slowly improving NWC trend since 2019. In 2023, Saudi companies on average achieved a two-day year-on-year improvement in their DSO, largely due to continued efforts by the government to accelerate cash release and to corporates improving their internal practices.

The UAE maintained its working capital performance in 2023, following an abrupt correction in 2022 to reverse the general deterioration in companies’ working capital management during the pandemic. In 2023, marginal improvements and deterioration across the DSO, DPO and DSO cycles balanced each other, with the average number of NWC days remaining at 83 days, the same figure as in 2022.

In 2023, 54% of companies across all sectors improved their year-on-year working capital performance. This was only a slightly higher proportion than in 2022 (52%) and previous years, illustrating a key message to emerge from the current study. Many companies in the Middle East are still too focused on one-off tactical working capital improvements such as chasing customers, selling off inventories and delaying payments. Not enough are implementing lasting changes to internal processes which in the longer term will deliver sustainable efficiencies.

The healthcare sector continues its year-on-year improvement trend for another year with a notable reduction in the overall working capital cycle. There are improvements across all three cycles, however the most significant is in DPO with a 20% jump year-on-year to 87 days in 2023 (the highest DPO in the last 5 years).

The case for implementing sustainable working capital improvements

Many Middle East companies are continuing to improve their working capital efficiency after a general deterioration in their performance during the pandemic. However, there is still too much dependence on short-term actions such as stretching suppliers, targeted collection efforts or liquidating inventories. These measures often do not deliver lasting working capital efficiencies as they do not address the internal process inefficiencies or system limitations that are driving the underlying working capital performance.