Upfront payment drive eases working capital struggle

Reuters/Mohamed Abd El Ghany

• Shift to more favourable terms
• Receipt of payments ‘challenging’
• Retail sector suffering most

Companies in the Middle East are negotiating better payment terms before beginning a project to try to prevent working capital issues down the line.

Katy Holmes, CEO of the British Chamber of Commerce Dubai, said there had been a “significant shift” towards more favourable terms for suppliers across a wide spectrum of sectors represented by the organisation.

“Companies are increasingly negotiating substantial upfront payments before work commences,” she said. 

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“The enhanced liquidity allows businesses to invest and grow with greater assurance, creating a positive ripple effect throughout the broader business environment, contributing to a more robust and dynamic marketplace.”

Working capital is a combination of day sales outstanding, days payables outstanding and days inventory outstanding.

A report from the consultancy PwC Middle East revealed that the average time taken for companies to pay suppliers, vendors and creditors across the region has returned to 2019 levels of 65 days, from as high as almost 70 in 2021.

Average days of inventory outstanding, which measures how long companies hold stock before sales, remained stable at just over 93 days.

This is reflected in the latest purchasing managers’ index for Qatar, which showed output has risen continuously for over four years, except for two brief pauses in January and December last year.

The report from S&P Global said: “While accepting new contracts, companies continued to reduce the volume of outstanding orders, albeit at the slowest rate in the current seven-month sequence of backlog depletion.”

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Fifty-four percent of companies across all sectors improved their working capital performance in 2023, according to the PwC report, marginally up from the 52 percent reported the previous year.

Bahrain was shown to have the shortest working capital cycle, at 44 days, which has fallen consistently over the past three years. Kuwait has also seen a year-on-year drop from 91 days in 2022 to 74 days last year.

Longest cycle

While the UAE has remained consistent, Egypt, Jordan, Oman and Qatar have all had their working capital cycle increase.

Although Saudi Arabia has shown signs of improvement, with its working capital cycle reducing every year since 2019, the kingdom still has by far the longest cycle in the region.

Dr Naim Maadad, founder and CEO of Gates Hospitality in the UAE, said progress was still needed to tackle working capital concerns in the country.

“Receipt of payments remains challenging, especially in Saudi Arabia, and margins are definitely shrinking due to increasing competition and reduced client budgets, including large scale projects,” he said.

Mo Farzadi, business restructuring services leader at PwC Middle East, said the retail and consumer arena sits at the top of the sectors of most concern over the availability of working capital, followed by utilities and mining and industrial manufacturing.

In the retail sector in particular, Farzadi said, the gap between when inventory is ordered and when it is sold and cash is collected can be anywhere between three and six weeks.

“I would say there's certainly a lot more room for improvement in the Middle East as compared to some other mature markets like the UK or the US,” Farzadi said.