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Europe/US Working Capital Survey
By Marc Loneux
2005 European Working Capital Survey
The latest survey on the working capital situation of the largest 1,000 European companies by sales reveals for the year 2004 a further improved performance, with a year on year drop of 3.3%. European corporations still continue to pay attention to working capital management as a way to drive liquidity and returns. Each working capital component contributed last year to the overall improvement.
A more refined working capital analysis shows a higher proportion of sectors reporting improved year on year performance, suggesting a lower magnitude in weighted reduction changes. Among those that have shown the biggest meaningful working capital improvements last year were Aerospace & Defense, Distillers & Brewers, Food Retailers and Telecoms, while Auto Manufacturers, Commodity Chemicals, Electrical Components and Industrial Diversified were flat or deteriorated.
A detailed country analysis reveals improved DWC performance across nearly every European country. Among the major economies, Italy and the UK saw the biggest working capital improvements last year, but their performance was more mixed when compared with 2002. France and Germany registered further DWC reduction, but at a substantially lower rate than in 2003.
While progress has been achieved, an initial benchmark and comparative information analysis reveals that the largest European companies still have in total close to €480bn of cash unnecessarily tied up in working capital. In addition, implementing best practice working capital strategy and processes would also result in annual cost reductions of up to €16bn, translating into an improvement of 3.2% in the total reported EBIT. The value of this cost potential would add an extra 27% to the working capital cash potential.
The introduction of 'Collaborative Working Capital Management' would translate into further cash and operating cost opportunities that have not been factored in our above estimates. Going forward, the working capital picture is likely to be more discriminating across companies and sectors. A cause for concern is a possible management attention shift out working capital towards growing the business, the investment, and the bottom line at a time when corporate liquidity is much improved and the rate of working capital improvement reaches a point of diminishing returns.
2005 US Working Capital Survey
The latest survey on the working capital situation of the largest 1,000 US companies by sales reveals for the year 2004 a further improved performance, with a year on year drop of 2.5%. While showing a lower rate than in 2003, this means that US corporations still continue to pay attention to working capital management as a way to drive liquidity and returns. Each working capital component contributed last year to the overall improvement.
A more refined working capital analysisshows a higher proportion of sectors reporting improved year on year performance, suggesting a lower magnitude in weighted reduction changes. Among those who have shown the biggest meaningful working capital improvements last year were Aerospace & Defense, Computers, Containers & Packaging, Cosmetics/Personal Care and Food, and Broadline Retailers, while Air Freight, Pharmaceuticals and Telecoms deteriorated.
While progress has been achieved, an initial benchmark and comparative information analysis reveals that the largest US companies still have in total up to $460bn of cash unnecessarily tied up in working capital. In addition, implementing best practice working capital strategy and processes would also result in annual cost reductions of up to $23bn, translating into an improvement of 2.9% in the total reported EBIT. The value of this cost potential would add an extra 40% to the working capital cash potential.
The introduction of 'Collaborative Working Capital Management' would translate into further cash and operating cost opportunities that have not been factored in our above estimates.
Going forward, the working capital picture is likely to be more discriminating across companies and sectors against a background of strong business activity. A cause for concern is also a possible management attention shift out working capital towards growing the business, the investment and the bottom line at a time when corporate liquidity is much improved and the rate of working capital improvement reaches a point of diminishing returns.
About the Author
Marc Loneux is a Chief Financial Analyst at the REL Consultancy Group REL's methodology is about generating cash improvement from working capital and operations to deliver strategic flexibility and competitive advantage.
Every program is customized to the needs and goals of the individual client based on an in-depth understanding of your particular industry, corporate structure and business environment.
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