"A high-level comparative analysis reveals that Indian companies have up to Rs 5.3 trillion or USD 97 billion in cash unnecessarily tied up in their working capital processes. This is equivalent to 12 per cent of their aggregate sales," said Ernst & Young - tax and advisory services provider.
The report, 'All Tied Up', is based on the working capital performance of 500 leading companies in India.
These working capital results were achieved in the context of a marked slowdown in the Indian economy during the year as well as challenging global economic and financial conditions, the report said.
Sales growth of the 500 leading companies have halved while operating margins of the majority of the companies have declined, the report said.
The debt levels are continuing to rise and return on capital employed is at a five-year low, it added.
Consequently, domestic companies have been scrutinising their balance sheets and are actively seeking ways to enhance their cost efficiency, release cash and optimise the structures of their assets, the Ernst & Young report said.
Partner, Working Capital Advisory Services Ernst & Young India, Ankur Bhandari said: "There is a natural tendency among many companies to blame tough business environment for poor performance as customers struggle to pay on time, supply chains fail to keep pace with falling demand, and suppliers seek to get early payments."
Companies should pay more attention to working capital management as they seek to release cash to support operational cash flow demands, fund capex and improve bottom line, Bhandari said.
The report observed that compared to their peers in the US, Europe, Japan and other Asian countries, domestic firms are at the bottom of global working capital performance.
"While this may be partly due to variations in their business models and geographic footprint, it also points to fundamental differences in the degree of management's focus on cash and in the effectiveness of working capital management processes against the backdrop of rapidly changing business, financial market and regulatory conditions," Ernst & Young said.
Not treating working capital as an operational issue, poor system data management, insufficient focus on continuously adapting business policies and processes to a rapidly changing environment appear to be the primary reason for the divergence in working capital trends between India and the US and Europe, the Ernst & Young report added.
It also gives some suggestions that companies in India should focus on in order to implement effective working capital management strategies to raise cash and improve operational efficiency.