The amount of cash held up between corporates and their suppliers hit a record high in 2020 as the Covid-19 crisis upended supply chains and stalled consumer demand worldwide, leaving firms with excess inventory levels. This is among the key findings in the 2021 edition of JP Morgan’s Working Capital Index report, published this month.

The annual report, which analyses the working capital metrics of companies listed on the S&P Composite 1500 index, found an estimated US$507bn of liquidity was trapped within the supply chains of the S&P 1500 companies as at the end of last year, the highest level in 10 years and a marked increase on 2019’s figure of US$497bn.

“Covid-19 has further exposed the vulnerabilities of global supply chains, which were already under pressure in recent years as a result of the geopolitical trade tensions,” says Gourang Shah, global head of treasury and working capital optimisation for wholesale payments at JP Morgan, who is an author of the report, which was first launched in 2019. “A key focus for finance practitioners will be to continue building supply chain resiliency in their operations, in order to withstand future shocks as well as to mitigate the negative impact on working capital.”

A closer look at the figures shows almost two-thirds of companies experienced deterioration in their working capital efficiencies in 2020, with the aerospace and defence, and airlines sectors unsurprisingly among the hardest hit as the demand for travel collapsed amid widespread lockdowns and movement restrictions.

Meanwhile, the semiconductor industry showed the most improvement in working capital efficiencies, on the back of strong sales of consumer electronics goods and increased demand for cloud services as the global working population pivoted to remote work arrangements.

Looking at individual metrics, cash-to-sales levels also rose to heights not seen in seven years as corporates turned to fundraising initiatives and cash preservation measures to shore up their liquidity buffers amid the pandemic. This increase was particularly acute among smaller firms, which saw an increase of 4.7% in cash levels versus a 4% rise among their bigger counterparts – a disparity caused in large part by a reduction in appetite among lenders to provide capital to smaller firms.

Through examining the recovery trends of the S&P 1500 companies in previous economic downturns of similar magnitude, the report also found that companies with robust working capital efficiencies were able to bounce back faster – demonstrating the importance of unlocking trapped liquidity in supply chains.

“We observed strong correlation between companies that were able to manage working capital effectively during the recovery phase of the global financial crisis in order to access internal funding and the pace of rebound in their revenue growth. This reiterates the importance for corporates to actively deploy working capital tools as a means to recover quickly from the Covid-19 crisis,” says Shah.

According to the report, the top four industries expected to show the most growth as they rebound from the pandemic include the semiconductor, e-commerce, pharmaceutical and technology hardware sectors.

As corporates prepare for a recovery in their businesses, the bank says treasurers are now beginning to revisit their cash management strategies and shift focus from cash preservation to cash deployment to support business growth.

“We continue to see strong demand for tools supporting supply chains amid inventory swings as a result of the pandemic, as well as the continued focus on extracting better payment terms from vendors,” Keith Murphy, North America sales head for global trade finance at JP Morgan, tells GTR. “A number of corporates are also embracing structures and programmes that enable sales growth without consuming precious capital tied in account receivables.”

With the global economy now seemingly on the road to recovery, JP Morgan predicts that working capital levels will likely trend lower this year as consumer confidence rebounds and demand for goods and services returns.