Opportunity for improvement

  • Share

The wide variations in WC performance between different companies in each regional industry point to significant potential for improvement — with up to US$1.3 trillion of cash tied up in WC of the leading 2,000 US and European companies.

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

The range of cash opportunity is defined as the sum of the WC cash opportunity derived for each company. This has been calculated by comparing the 2012 performance of each of its 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$360b and US$660b of cash unnecessarily tied up in WC. This range of cash opportunity is equivalent respectively to between 12% and 21% of their WC scope (defined as the sum of trade receivables, inventories and accounts payable) and between 3% and 6% of their aggregate sales.

The 1,000 European companies would have in total between €290b and €490b of cash unnecessarily tied up in WC. This range of cash opportunity is equivalent respectively to between 11% and 19% of their WC scope and between 4% and 7% of their aggregate sales.

In total, the leading 2,000 US and European companies would have up to US$1.3 trillion of cash unnecessarily tied up in WC, equivalent to nearly 7% of their aggregate sales. This figure is similar to last year’s.

Our ‘cash potential’ analysis reveals that the opportunity is distributed across the various types of WC components, with 35% coming from each of 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 is likely to be ambitious, as it ignores differences in commercial strategies (impacting cash discounts and payment terms), customer base and other factors.

The consolidated figure would also be lower if intra-company benefits were excluded. On the other hand, the opportunity is calculated for each company’s WC component by comparing its performance not against the best performer, but against the top quartile of its industry peer group.

WC cash opportunity, 2012

  Cash opportunity
Region Value % WC scope* % sales
  Average Upper quartile Average Upper quartile Average Upper quartile
Europe €290b €490b  11% 19% 4% 7%
United States US$360b US$660b 12% 21% 3% 6%

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

Source: Ernst & Young analysis, based on publicly available annual financial statements

Download the full report