2 minute read 9 Dec 2019
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How companies can improve working capital

Authors
Sven Braun

EY-Parthenon Principal, Ernst & Young LLP

Leader in supply chain transformation and working capital optimization. Global citizen and surfer.

Peter Kingma

EY Americas Working Capital Consulting Services Leader

Guides global organizations through working capital transformations, unlocking cash and strengthening balance sheets. Committed to results. Loves skiing and hiking.

2 minute read 9 Dec 2019

Many companies continue taking steps to drive cash and cost out of working capital to grow their returns and increase shareholder value.

A
n analysis of working capital performance among the largest companies in the US and Europe reveals improvement in both regions in 2018. For the US companies analyzed, cash-to-cash (C2C) decreased by 2% from 2017 levels, after a stable phase in the previous year. For 2018, C2C performance also decreased by 2% for the European companies analyzed.

Companies outside the US and Europe fared worse in 2018. Four out of seven regions and countries analyzed reported an improvement in working capital performance, but only three showed better year-on-year results — if oil and gas (O&G) and mining and metals (MM) industries (which have vastly different capital structures compared to other industries) are excluded. Interestingly, small and medium-sized enterprises (SMEs) had performed better than the large companies in 2018.

Overall, our findings suggest that most companies continue to have significant opportunities to improve in many areas of working capital. A high-level comparative analysis indicates that the leading 1,500 US and European companies may have as much as US$2.5 trillion in excess working capital, over and above the estimated levels required to operate their business model and meet operating cash requirements. This figure is equivalent to nearly 10% of their combined sales. In other words, for every US$1 billion in sales, the opportunity for working capital improvement is, on average, US$100 million.

Working capital

US$2.5 trillion

in excess working capital is estimated for the leading 1,500 US and European companies.

Yet, while some benefits may still be available through relatively simple steps, such as improving billing and cash collections or extending supplier payment terms, most companies seeking further gains will need to embrace more substantial and sustainable changes in the way they manage their working capital. Such changes may include making sure that:

  • Working capital remains a strategic focus throughout the year, with the entire organization engaged and incentivized to drive improvement
  • The organization is responsive to change, with lean and agile manufacturing and supply chain solutions deployed for different products or market segments; enhancing responsiveness through cross-functional cooperation and effective collaboration between participants in the extended enterprise
  • Supply chains are resilient, through robust risk management policies, alternative sourcing, and enhanced visibility across the end-to-end supply chain
  • Strong discipline in terms and transactions, internal controls over cash and working capital, and appropriate performance measures are in place
  • The complex and evolving trade-offs between cash, costs, delivery levels and the risks that each company must take are clearly understood and properly managed
  • About the report

    “All tied up 2019” is the 12th publication in a series of working capital management reports based on EY research on the working capital performance of the world’s largest companies.

    The survey focuses on the top 1,500 companies in the US and Europe, examining their working capital performance at a company, regional, industry and country level. It also provides insights into the working capital performance of approximately 1,500 companies in seven other regions and countries (Asia; Australia and New Zealand — Aus/NZ; Canada; Central and Eastern Europe — CEE; India; Japan; and Latin America — LatAm). In addition, this report summarizes findings of an analysis comparing the working capital performance of small and medium-sized enterprises (SMEs) with that of large companies.

    See also page 21 of the full report.

Summary

The “All tied up” report is based on Ernst & Young LLP research on working capital performance of the largest companies in the US and Europe.

About this article

Authors
Sven Braun

EY-Parthenon Principal, Ernst & Young LLP

Leader in supply chain transformation and working capital optimization. Global citizen and surfer.

Peter Kingma

EY Americas Working Capital Consulting Services Leader

Guides global organizations through working capital transformations, unlocking cash and strengthening balance sheets. Committed to results. Loves skiing and hiking.