In the last two years, the level of bad debt in the balance sheet in relation to sales has been increasing at a faster pace, reaching 2.8% in 2010.
In 2010, operators in Europe managed to both reverse the deterioration in WC performance seen in 2009 and beat the previous record of 2008. The net trade WC to sales ratio dropped from –3.6% in 2009 to –4.6% in 2010 (it was –4.1% in 2008). Cash to cash (C2C) fell by 3.5 days to reach a negative figure of 0.2 day.
Change in WC metrics, 2009–10
|Days ||2010 ||Change 10/09 |
|DSO ||53.9 ||2% |
|DIO ||5.4 ||5% |
|DPO ||59.5 ||9% |
|C2C ||-0.2 ||-0.2 day (down 3.5 days) |
| || || |
|%sales ||2010 ||2009 |
|Net trade WC ||-4.6% ||-3.6% |
Number of companies showing improved WC performance, 2010 vs. 2009
| ||Change 10/09 |
|DSO reduction ||7 |
|DIO reduction ||5 |
|DPO enhancement ||10 |
|C2C reduction ||11 out of 15 |
| || |
|Net trade WC reduction ||11 out of 15 |
Note: DSO (days sales outstanding), DIO (days inventory outstanding), DPO (days payable outstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis
Source: Ernst & Young analysis, based on publicity available annual financial statements.
WC improvement in 2010 was entirely due to higher levels of payables (DPO up 9%). By contrast, performance deteriorated for both receivables and inventory, with DSO and DIO up 2% and 5%, respectively. Levels of amounts billed in advance for line rentals and subscriptions (deferred income) remained unchanged at 4.5% of sales. Eleven companies out of 15 reported a year-on-year improved WC performance.
More specifically, several factors may explain the reported year-on-year WC variations, each with varying impacts on different companies:
- Rise of data and mixed macroeconomic conditions.
- Effects of outsourcing and network sharing.
- Greater attention to payables.
- Increased complexity in billing.
- Inventory challenges.
Rising levels of bad debt
In the last two years, the level of bad debt in the balance sheet in relation to sales has been increasing at a faster pace, reaching 2.8% in 2010. This was most notable among weaker European economies, while the customer debt profile improved in many emerging countries.
Opportunity for improvement
Variations in WC performance between operators in Europe point to significant potential for improvement.
A high-level analysis suggests that the leading 15 European operators have between €10 billion and €20 billion of cash unnecessarily tied up in WC processes, equivalent to between 2.9% and 5.8% of sales.
WC cash opportunity, 2010
| ||Cash opportunity |
| ||Value (€b) ||% WC scope* ||% sales |
| ||Average ||Upper quartile ||Average ||Upper quartile ||Average ||Upper quartile |
|Receivables ||4.1 ||9.3 ||8% ||18% ||1.2% ||2.7% |
|Inventories ||0.4 ||1.3 ||7% ||25% ||0.1% ||0.4% |
|Payables ||5.6 ||9.6 ||10% ||20% ||1.6% ||2.8% |
|Total ||10.1 ||20.2 ||9% ||18% ||2.9% ||5.8% |
*WC scope = sum of trade receivables, inventories and accounts payable
Source: Ernst & Young analysis, based on 2010 publicly available annual financial statements.
For a detailed regional analysis, please see tables 5 – 8 (noted in the pdf).
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