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All tied up - Working capital management report 2011 - Opportunity for improvement - EY - Global

All tied up: Working capital management report 2011

Opportunity for improvement

  • Share

WC cash opportunity, 2010

  Cash opportunity
Region Value % WC scope* % Sales
  Average Upper quartile Average Upper quartile Average Upper quartile
Europe €250b €430b 11% 19% 4% 7%
United States US$310b US$550b 12% 21% 3% 6%

* WC scope = sum of trade receivables, inventories and accounts payable

Source: EY analysis, based on Q4 10 publicly available financial statements.



Our cash potential analysis reveals that the opportunity is distributed across the various types of WC components, with 35% each coming from receivables and payables and 30% from inventory.

Summary: The wide variations in WC performance between companies within each industry point to significant potential for improvement — up to US$1.1 trillion of cash for the leading 2,000 US and European companies.

The range of cash opportunity has been defined as the sum of the WC cash opportunity derived for each company. This has been calculated by comparing the 2010 performance of each company’s WC components with the average (low estimate) and the upper quartile (high estimate) achieved by its industry peer group.

On this basis, the 1,000 US companies included in this research would have in total between US$310b and US$550b of cash unnecessarily tied up in WC. This range of cash opportunity is equivalent to between 12% and 21% of the WC scope (defined as the sum of trade receivables, inventories and accounts payable) and between 3% and 6% of sales.

The 1,000 European companies would have in total between €250b and €430b of cash unnecessarily tied up in WC. This range of cash opportunity is equivalent to between 11% and 19% of the WC scope and between 4% and 7% of sales.

In total, the leading 2,000 US and European companies would have up to US$1.1 trillion of cash unnecessarily tied up in WC, equivalent to nearly 7% of their sales. This figure is similar to last year’s in spite of the overall progress achieved, meaning that the spread of performance across companies within each sector remained constant.

WC cash opportunity, 2010

Our cash potential analysis reveals that the opportunity is distributed across the various types of WC components, with 35% each coming from receivables and payables and 30% from inventory.

The reported figures for the cash opportunity have to be treated with a degree of caution, as they are based on an external view of each company’s WC performance within its industry based on public consolidated numbers.

The top end of each range (when the opportunity is calculated for each company’s WC component) is likely to be ambitious, as it ignores differences in commercial strategies (affecting cash discounts and payment terms), customer base, supply, product mix, country sales exposure and local payment terms practices, which can vary widely, especially across Europe. With companies also trading with each other, the consolidated figure would be lower if intra-company benefits were excluded.



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