By Daniel Hunter

Working capital performance stalled at European companies in 2011 compared to 2010 but in contrast improved at US companies, with the key measure of cash-to-cash (C2C) dropping by 3% in the US and remaining unchanged in Europe – according to All tied up 2012, Ernst & Young’s latest Annual Working Capital Management Survey.

Despite the modest improvement in working capital performance in the US and the flatlining in Europe, those surveyed — 2,000 of the largest companies (by sales) headquartered in the US and Europe — still have an aggregate total of US$1.2 trillion in cash unnecessarily tied up in working capital. This is equivalent to nearly 7% of their sales, on par with the percentage from 12 months ago.

Free up cash from the balance sheet or forever hold your peace

“While there have been signs of corporate confidence in the global economy, macro-economic uncertainty in Europe has left many businesses and financial institutions cautious on financing and growth," Jon Morris, Head of Working Capital Management at Ernst & Young for Europe, Middle East, India and Africa said.

“Now’s the time for companies to challenge their working capital performance and seek effective strategies to free up excess cash from the balance sheet to reduce net debt, fund growth or business transformation, or even return value to shareholders.”

Europe vs US

The overall working capital performance gap between Europe and the US widened in 2011, reversing the tightening trend observed over the previous two years when Europe was closing the gap with the US. The US continues to exhibit much lower levels of working capital. Overall C2C is 10 per cent below that of Europe, driven by a strong performance in inventory (15% below that of Europe).

In Europe, companies saw a deterioration in C2C performance, with 49% reporting better C2C performance, a sharp decrease from 57% in 2010. A slightly higher proportion of companies posted improved receivables and payables (50% each) over improved inventory performance (42%).

In the US, 54% of the surveyed companies showed improved C2C performance in 2011 compared with 2010, up from 53% last year. The majority of US companies reported improved receivables (56%) and inventory performance (52%), but only 44% of respondents reported improved payables.

“Despite the demand and desire for European corporates to improve their cash performance, these businesses are having to manage the impact of a number of key drivers in order to achieve this," Morris said.

"While improved financial technology can enable improvement; the volatility of demand, risk of customer default, leaner and less flexible supply chains, the physical distance created by shared service centers as well as sheer geographical spread of businesses today mean that managers need to be smarter and more integrated to release cash in a sustainable way.”

Performance by sector

In contrast to the previous two years, the gap in working capital performance between cyclical industries — such as automotive supply, chemicals, diversified industrials, semiconductors and steel — and noncyclical industries — such as food producers, food and general retailers and pharmaceuticals — narrowed in 2011 as cyclical industries returned to a more normal growth path on the heels of the global downturn in 2008.

As the gap between cyclical and noncyclical industries closes, the divergence in working capital results between the US and Europe across industries grew, driven by currency fluctuations and different growth patterns in the last quarter of 2011 The working capital results of food producers, food and general retailers, pharmaceuticals, chemicals and semiconductors in Europe all fared significantly worse compared to their US counterparts. However, the oil industry in both regions registered a significant improvement in working capital performance.

Improving working capital management

While the total reduction in C2C achieved since 2002 is now 16% for both the US and Europe, the rate of working capital improvement has been decelerating across geographies. In the past three years, C2C performance has stagnated in both regions, while average annual gains were approaching 3% in the previous six years.

While this global deceleration suggests that some opportunities for working capital improvements may have already been exploited, companies are reacting to challenging market conditions by increasing their focus on working capital management and making aggressive inventory adjustments.

“With rising product complexity, high commodity prices and expansion into new geographic markets adding significant stress to the supply chain, companies need to take their working capital performance to a whole new level. Many companies only really focus on working capital metrics at key reporting periods such as quarter and year-end and miss out on huge potential cash gains by getting into a monthly or even weekly rhythm,” concludes Morris.

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