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Working capital management 2014

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Our analysis of the working capital (WC) performance of leading companies in the US and Europe in 2013 shows a further deterioration in the US and relative stability in Europe, compared to 2012.

  • For the US companies analyzed, cash-to-cash (C2C) increased by 1% from its 2012 level, after a rise of 2% in the previous year.
  • For Europe, this year’s stable performance contrasts with the progress made the year before, when C2C fell by 4%.

However, further analysis reveals wide variations in the level and direction of changes in C2C both between industries, and between sub-regions and countries in Europe. These variations were exacerbated by differences in the intensity of management focus on cash and WC, as well as by the impact of changing commodity prices and exchange rates.

Companies in other regions and countries fared better in 2013, with overall C2C falling by 2%, after an increase of 3% the year before. However, had the oil and gas, and metals and mining industries been excluded from our calculations, C2C would have been unchanged from 2012.

Interestingly, small and medium-sized enterprises (SMEs) and larger companies performed to similar levels in 2013. This marked a halt to the narrowing of the WC gap between the two segments that we had observed in previous years.

Overall, our research suggests that most companies continue to have huge opportunities for improvement in many areas of WC. A high-level comparative analysis indicates that the leading 2,000 US and European companies still have up to US$1.3t of cash unnecessarily tied up. This amount is equivalent to nearly 7% of their combined sales. In other words, for every US$1b in sales, the opportunity for WC improvement is, on average, US$70m.

Need for continuous operational and structural improvements

To realize these WC benefits, companies will need to drive continuous operational and structural improvements, addressing “root and branch” aspects of WC policies, processes and metrics. Key initiatives should include:

  • Managing WC as a strategic initiative, including aligning executive compensation with appropriate performance measures
  • Further streamlining of manufacturing and supply chains
  • Closer collaboration and process alignment with customers and suppliers
  • Better coordination between functions and processes in supply, planning, manufacturing, procurement and logistics
  • Improvements in billing and cash collections and more effective management of payment terms
  • Intensification of spend consolidation and standardization
  • Implementation of more robust supply chain risk management policies

Addressing this opportunity would boost companies’ return on capital, as well as offering potential for higher cash returns to shareholders. Additionally, by continuously managing the business to achieve improved or top-tier WC performance, companies would send a positive signal to the capital markets. This would likely be rewarded with a higher valuation in comparison to their peers.