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The PwC European Working Capital Study
Cash release from the supply chain remains the biggest challenge
by Damien McMahon, Didier Vandenhaute and Martin Böhme, PwC, Finance and Treasury Solutions
The study shows that the 1200 European companies unnecessarily tie up €475bn in their working capital. It also reveals that little structural change has been made in relation to working capital. This article contains highlights of the study. A complete version of the study report is available directly from PwC.
In 2010 PwC conducted their Working Capital Management study for the third time. This year, the study aimed to understand how the global financial crisis and subsequent economic recession have affected the liquidity of corporates and the way they manage working capital. For this purpose, PwC analysed over 1,200 listed companies from 12 European countries. For each country the top 200 companies based on their market capitalisation were taken into account, and were grouped in 10 different industry categories.[1]
The study gives an indication of the current market trends in the analysed sectors and countries, and provides an initial external benchmark with peers. The key findings of the study are:
- European companies have unnecessarily tied up more than €475bn in working capital
- For the first time since 2005, working capital ratios have deteriorated
- All three working capital areas have deteriorated from 2008 to 2009
- Supply chain management remains the biggest challenge
For the first time since 2005, European working capital levels deteriorate
We analysed companies’ working capital ratio—the relationship between working capital and annual turnover, and discovered an average of 20.8% across Europe in 2009. The 2009 levels represented a rise of 0.4% over 2008 and a clear break from the downward trend that had established itself over the previous five years (see Figure 1).
The old myth of countries with long payment terms also carrying higher levels of working capital turns out not to be true.
The working capital ratio is the net working capital divided by annual sales. This easy ratio ultimately gives an indication on the flexibility of the supply chain of the company in question, and efficiency of the underlying processes. This means, in an environment with decreasing turnover, is the organisation also able to adapt its level of working capital?
It seems that these results show once the heat of the credit crisis had started to cool off, companies started loosening their tight grip on working capital management. Were the improvements that had been made in the heat of the crisis just temporary or rather patchwork solutions?
The observation above led to the following two conclusions, as Martin Böhme, Manager, PwC, Finance and Treasury Solutions, explains: “Firstly, the crisis had large impact on liquidity of large, listed companies. With strong focus on cash and liquidity we would rather expect an overall improvement rather than deterioration by 0.5% especially that the crisis is not over yet. Secondly, it seems that creation of sustainable improvements turns out to be illusive. The ratios are not yet back to the 2007 or 2006 levels but the overall trend is at least worrying as it means that improvements haven’t been implemented sustainably and have been done in a patchwork manner.” This would require more structural change to underlying core processes, something of which companies have not invested significantly so far.
Year-on-year variations by country
The old myth of countries with long payment terms also carrying higher levels of working capital turns out not to be true. Some of the southern European countries, where traditionally longer payment terms are prevailing, have been able to realise some significant improvements: Spanish companies improved their working capital ratio by 1.3%. Also, Belgian companies by 1.1%, and French firms by 0.8% (see Figure 2).
One of the key reasons could be the increased attention devoted to cash due to recent regulatory changes. In the course of 2009 new legislation restricting payment terms has been introduced in France and in 2010 in Spain. The transition period in Spain is going to last until 2013, after which payment terms are limited to 60 days.
