Working capital management has never been better in Europe
( 18-03-2013 16:11:54) - Pascal Clinckaert.
The largest European companies have never been better at managing their working capital and UK companies are the most efficient compared to their neighbors, a new PwC study shows.
Working Capital: Never Been Better analyses the working capital performance of Europe's largest publicly listed companies and shows that the UK cash-to-cash conversion cycle was an impressive 55 days in 2011, down from 60 days in 2010. Using Days Working Capital (DWC) as a measure of working capital efficiency, the study shows how many days it takes for companies across Europe to convert their working capital into revenue. The faster companies can do this the better.
After the UK, other country groups that showed good working capital management were Central Europe (58 days) and Russia/Ukraine (63 days). The worst performing country was France (83 days), followed by the Nordic countries (78 days) and Germany, Switzerland, Austria and Italy, all at 77 days. Overall European cash conversion cycles have decreased by 5 days to 70 days between 2010 and 2011, mainly due to improvements in receivables and inventories.
Robert Smid, PwC working capital partner, said:
"Cash has become an expensive resource which is more and more difficult to obtain. We should not forget that working capital is the cheapest source of cash, and as most companies have trapped cash sitting on the balance sheet, it makes sense they squeeze as much cash as possible from working capital before seeking additional external financing. This is a move that is likely to be looked upon favorably by lenders who are encouraging organizations to take a more proactive stance in managing their own cash flow. Consequently, working capital management and cash flow forecasting are at the top of the agenda of CFOs and finance executives.
"The increased attention on working capital after the 2008 recession has had a positive impact on the performance of the largest listed companies in Europe. Since then, CFOs have been quick to act and now see working capital as a strategic priority to generate cash and this trend has continued into 2011.
"However, our study also highlights a polarization where the good performers were able to release cash and fund their own growth while the bad performers deteriorated and had to find additional cash to fund their growth. Although the performance of companies across Europe is improving, the gap between the top 25% and the bottom 25% is widening. In other words the good performers are getting better and the bad are getting worse."
Although overall European working capital levels are decreasing, the differences in performance are very significant. The study shows that the difference between the good and bad performers is getting more pronounced and this indicates that there is huge improvement potential for those that are not in the upper quartile (top 25% performers). Overall, the study shows that 2,307 of the largest listed European companies had over €900bn (£700bn) unnecessarily tied up in working capital in 2011, which could have been released if all companies included in the study were to match the performance of the upper quartile. By comparison, UK companies had over €59bn (£49bn) tied up in 2011, which could have been released if they had better managed their working capital.