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Working capital management: all tied up - Key working capital results - EY - Global

Working capital management: all tied up

Key working capital results

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WC performance for the US and Europe, 2002-11


WC performance for the US and Europe, 2002-11


The results for 2011 bring the total reduction in C2C achieved since 2002 to 16% for both the US and Europe

Relative to 2010, WC performance has improved in the US, with C2C dropping by 3%, but stalled in Europe, where C2C has remained unchanged.

For the US, these headline results show an accelerated improvement in WC performance compared with 2010, when C2C fell by 2%. For Europe, this year’s stability in C2C sharply contrasts with the drop of 4% reported in the prior year.

For the US, the overall improvement in C2C performance in 2011 arose from a combined reduction in receivables and inventories (Days sales outstanding - DSO and Days inventory outstanding - DIO down 3% and 2%, respectively) which was partly offset by lower payables (Days payable outstanding - DPO down 3%). In Europe, receivables and payables were marginally down (DSO and DPO each down 1%), while inventory was slightly up.

WC performance drivers

Unusual quarterly sales patterns. Global sales in 2011 did not follow the usual seasonal trends. Growth was strong in the first half of the year, albeit disrupted in the second quarter by the impact on production and supply chain of the Japanese earthquake and tsunami.

The third quarter saw a rebound in production, but this was followed by a significant slowdown in the final months of the year as a result of macroeconomic concerns in Europe and floods in Thailand.

These large variations in sales and production put significant additional stresses on WC management and on supply chains in particular. Compared with 2010, overall sales grew by 12% in the US and 8% in Europe in 2011.

Continued focus on WC management. Against a backdrop of challenging market conditions, a high proportion of companies have continued to take rigorous steps to drive cash and cost out of WC. Many have reported ongoing or new initiatives in this area, especially with regard to billing and cash collection, spend consolidation, low-cost country sourcing, extension of payment terms, and supply chain efficiency.

Inventory adjustments in response to deteriorating market conditions. In the final months of 2011, many companies responded to the rapid deterioration in the global business outlook by aggressively reducing production to prevent inventory build-up. For the US, the net result of these actions was a year-on- year decrease of 3% in DIO, while in Europe, inventory performance deteriorated slightly.

Stronger receivables performance. The drop in DSO reflects not only the sequential decrease in sales, but also the continuing benefits of a strong focus on cash collection and billing across the board. Better sales prospects may have also given companies the confidence to win business without compromising on terms.

Weaker payables performance. The decrease in DPO was primarily caused by reduced production levels in the final months of 2011. In some cases, this drop was accentuated by lower spending due to the expectation of softer demand in the early months of 2012. However, there were some notable exceptions, with the automotive supply and machine manufacturing industries reporting higher spending to serve continuing strong demand.

Volatility in commodity prices. Changes in input costs have continued to exert a material impact on WC performance. Commodity cost inflation returned in the second half of 2010, peaking in the summer of 2011, before falling back in the final months of the year (with availability of some materials returning to normal). In contrast to 2010, softening primary raw material prices in the second part of 2011 helped lower inventory levels and payables balances at year-end.

Currency movements effect. In contrast to 2010, currency movements had a large impact on WC performance in 2011. For companies reporting in US dollars, the sudden appreciation of the dollar against other main currencies at the end of 2011, compared with its average during the year, had a beneficial impact on WC performance.

WC performance for the
US and Europe, 2002-11


WC performance for the US and Europe, 2002-11

Conversely, for companies reporting in Euros, the relative softening of the euro against the US dollar at the end of 2011, compared with its average during the year, weighted negatively. For companies reporting in Swiss francs and in Norwegian kroner, the impact of currency movements was considerable.

The results for 2011 bring the total reduction in C2C achieved since 2002 to 16% for both the US and Europe.

 


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