Key working capital results
US and Europe
In 2012, WC performance deteriorated in the US but improved in Europe.
For both the US and Europe, the WC results for 2012 were significantly affected by rapidly changing global economic and financial conditions.
A review of WC performance among the largest companies in the US and Europe during 2012 reveals sharply diverging results. C2C increased by 2% in the US from its level in 2011, while dropping by 4% in Europe over the same period.
For the US, these headline results almost wiped out the gains achieved in the prior year (when C2C fell by 3%). By contrast, Europe reported significantly improved WC performance after a stable outcome the year before.
Change in WC metrics by region, 2011–2012
Source: Ernst & Young analysis, based on publicly available annual financial statements
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
WC performance drivers
Some of the factors contributing to WC performance included:
- A challenging environment, with contrasting growth trends across and within regions: For both the US and Europe, the WC results for 2012 were significantly affected by the impact of rapidly changing global economic and financial conditions. Companies responded by reducing production, cutting costs and delaying capital expenditure, as well as tightening control over cash and WC.
- Increased volatility in commodity and exchange rates: Commodity prices remained highly volatile throughout 2012, adding significant stresses to WC management and supply chains in particular.
- Continued attention to WC management: Many companies in both regions have continued to pursue new initiatives in this area – especially with regard to lean manufacturing, billing and cash collection, spend consolidation, low-cost country sourcing, renegotiation of payment terms, and supply chain efficiency.
- Increased focus on inventory: As global demand began to soften at mid-year 2012, companies focused on reducing production to prevent inventory build-up, resulting in a significant drop in the absolute levels of inventory between the third and the fourth quarter of the year for many of them.
- Varying receivables and payables performance: In the US, the increase in both days sales outstanding (DSO) and days payable outstanding (DPO) was probably exacerbated by the impact of unfavorable changes in exchange rates. In Europe, the decrease in DSO reflected the decline in sales, while the drop in DPO was primarily caused by reduced production levels in the final months of 2012.
- Disproportionate impact of the oil and gas industry and Apple on overall WC performance: Had the oil and gas industry been excluded from our calculations, the increase in C2C for the US in 2012 would have been reduced to 1.6% (down from 2.3%), and the decrease in C2C for Europe would have been limited to 3% (down from 4%). Had Apple been excluded from the US calculations, C2C would have increased by 3.0% (up from 2.3%).
The results for 2012 bring the total reduction in C2C achieved since 2002 to 14% for the US and 19% for Europe. Each of the WC components contributed to this improved performance.