Europe/US Working Capital Survey
Posted 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 analysis shows 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.<
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