Up to €20 billion tied up in working capital among leading European telcos - Ernst & Young - Global

London, 13 July 2009 — Up to €20 billion of liquidity could still be unnecessarily tied up in working capital among the 15 leading telecoms operators in Europe, despite significant progress being made in recent years, according to a new report by Ernst & Young.

Cash on the line finds that since 2000, the industry has also managed to reduce its use of working capital by €20 billion as overall net working capital balances improve from a positive 1.6% of sales to a negative 4.1%, (using total sales for 2008). In other words, this is the funding gap that operators would have had to finance today had working capital performance remained unchanged.

Despite this overall progress, the research continues to show a wide disparity in working capital performance. While part of this gap may reflect variations in business models and country behavioral norms, a major reason for this disparity in performance between operators is fundamental differences in management focus on cash and process efficiency.

Jon Morris, Global Telecoms Working Capital Management Leader, at Ernst & Young, says:
“While more rigorous steps have been taken to drive cash, the findings indicate plentiful opportunities for operators to release additional liquidity from working capital. The amount of €20 billion is equivalent to 6% of turnover for these businesses. In other words, for every €1 billion in sales, the opportunity for working capital improvement is, on average, €60 million.

“Receivables have been the main driver behind the overall improvement in working capital, with operators focusing on reducing event to bill and time to collect, as well as leveraging new technologies and incentivizing direct debit. Inventories have also been cut significantly but from a relatively low basis”.

Limited effect of the crisis
The effect of the economic and financial crisis on the industry’s working capital performance seems to have been limited so far.

Paul New, Director of Working Capital Management, at Ernst & Young, says:
“However, late or non-payment by business and residential customers could become more common.leading to increased bad debts and write-offs. Greater focus is now being placed on credit risk management and metrics to identify issues at an early stage. Operators could also choose to stretch supplier terms with their main suppliers, raising the potential for rising tensions between the various participants of the working capital value chain.”

Effective working capital management strategy
Morris concludes, “Major operators are committed to significant investment programs, while at the same time capital from the banks is much harder to come by. Making your own cash is therefore vital for the investment plans but creating a cash culture is not achieved overnight. Operators who are only just waking up to working capital will inevitably find the rapid change harder to adapt to, compared to those who have focused on it for some time.

“Against this backdrop, companies should continue to pay attention to working capital management as a way not only to improve cash but also to reduce cost and to enhance customer service.

“This scenario may result in a wider divergence of working capital performance between operators, with those excelling in this area likely to be less adversely affected than their peers.”

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