Working capital performance deteriorates at two-thirds of companies
US$1.1 trillion tied up in working capital among leading US and European organizations
LONDON, 19 July 2010 – Nearly two-thirds of the companies included in the annual Ernst & Young working capital survey reported deteriorations in performance in 2009 compared to 2008, with cash-to-cash (C2C) increasing by as much as 6% in the US and 3% in Europe.
All tied up, a report on the working capital performance of the 2,000 largest companies by sales, headquartered in the US and Europe, also finds that companies now have an aggregate total of up to US$1.1 trillion of cash unnecessarily tied up in working capital, an amount equivalent to nearly 7% of sales. This is a higher figure than a year before (when it was 6%), suggesting that the gap between best and worst performers has widened.
Jon Morris, Working Capital Management Leader at Ernst & Young LLP (UK), says:
“Working capital management has become an area of stronger focus in recent years, which raises the question of the true effectiveness of current strategies. However, the deterioration in performance is also explained by uneven growth patterns which showed large variations on performance across industries. For some companies, sales patterns and commodity prices significantly affected the measure of performance. 2009 was also another year marked by large currency fluctuations which had a significant impact on performance.”
US v Europe
In the US, just one-third of the companies in the survey posted an improved C2C performance in 2009 (compared to 63% in 2008). A majority of them (51%) managed to improve payables, while a much smaller proportion reported better inventories (36%) and receivables (25%) performance.
In Europe, 38% of the companies reported better C2C performance (compared to 50% in 2008). A slightly higher proportion of companies posted improved inventories (37%) than higher receivables and payables (32% each).
Europe saw an overall deterioration in working capital performance in 2009. Only Germany and the Scandinavian countries reported improvement over the previous year.
On the whole, US-headquartered companies exhibit better performance than those based in Europe. Overall C2C for the US in 2009 was 3.5 days, or 8% below that of Europe.
Steve Payne, Americas Working Capital Management Leader, at Ernst & Young, says:
“Trade terms are generally longer in Europe than in the US, although with wide variations across countries, notably between the North and the South. On a like-for-like basis, the US has a superior performance in inventory. Companies in the US have simpler supply chains than their European counterparts, due to the absence of national borders and the single currency and language in the US. In Europe, transport also takes longer and logistics costs are higher than they are in the US.
“The findings indicate plentiful opportunities for many companies to release additional liquidity from working capital. The 1,000 US companies included in the research would have in total between US$280 billion and US$515 billion of cash unnecessarily tied up in WC. The 1,000 European companies would have in total between €215 billion and €400 billion of cash unnecessarily tied up in WC.”
Effective working capital management strategy
“Implementing effective strategies and processes can generate significant operating cost reductions and also unlock the ‘cash potential’ tied up in working capital,” says Morris. “Leading companies will be those that take a structured “root and branch” approach to improving working capital by working even more closely with key customers and suppliers, driving ever greater efficiency out of the supply chain, sharing real-time information about supply and demand, and having robust risk management policies in place.”
About the report
This report contains the findings of a review of the WC performance of the largest 2,000 companies (by sales) headquartered in the US and Europe for the year 2009. The analysis draws on companies’ latest fiscal 2009 reports.
Performance comparisons have been made with 2008 and with the previous seven years.
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