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Cash for growth - Working Capital

Working Capital Advisory - June 2012 - PWC.

Cash for growth - Working Capital
Working Capital efficiency enables growth without additional funding requirements

Between 2007 and 2011, European companies that were most efficient at managing their working capital got better, those that were least efficient got worse. The ‘most efficient’ performers were able to fund their own growth and release cash, whereas the ‘least efficient’ performers had to find additional capital to fund their growth. The difference between these two groups was, on average per company over £300m. European companies currently in the ‘least efficient’ category have a combined potential improvement opportunity of £400 billion (or 30% of sales), if they were to match the performance of the ‘most efficient’ companies.

The ‘working capital performance gap’ has widened across Europe

Based on recent research the map above shows the gap in working capital performance between the ‘most efficient’ and ‘least efficient’ performers in absolute value terms (£m) between 2007 to 2011.
To illustrate, in the UK the ‘most efficient’ performers have reduced their working capital equating to an average reduction of £140m per company, whereas the ‘least efficient’ performers increased their working capital equating to an increase of £56m on average per company, creating a ‘performance gap’ of £196m.
For more information on our working capital advisory team and a recorded video interview with the authors of this study please use the following link:

Cash for growth - Working Capital

Good performers were able to fund their own growth and release cash, whilst the poor performers had to find additional capital to fund their growth

- Basis of our analysis was the 2007 to 2011 performance of the 4000 largest European companies, where we focussed on working capital performance as a percentage of sales and classified top performers as the upper quartile (i.e. top 25%), and the bottom performers as the lowest 25% of the population.
- We found that ‘most efficient performers’ across Europe (the top quartile) improved their Working Capital both in relative and absolute terms – they have reduced their working capital by on average £91m, and this despite growing their sales by 40%.
- In contrast, the ‘least efficient performers’ across Europe (the lower quartile) increased their working capital both in absolute and relative terms, which meant an increase of 226m on average per company.
- The results are consistent across Europe to a varying degree - the ‘gap’ amounts to £317m on average by company across Europe, with the lowest gap in central Europe (£47m), and the largest in Spain & Portugal (£613m).
- This basically means that the good performers were able to fund their own growth and release cash, whilst the bad performers had to find additional capital to fund their growth.

Least efficient performers could generate up to £400bn of cash by improving their working capital management

Assuming the recession will eventually end, working capital performance is going to be crucial for companies wishing to fund their own growth.
- Depending on the individual company working capital structure, the capital requirement in a growth period can, if managed poorly, grow faster than the sales growth. As an example, a company who is does not focus on obtaining timely settlement of outstanding invoices, will see their receivables outgrow sales in percentage terms.
- If all European companies currently in the ‘least efficient performers’ category would improve and achieve the same level as the ‘most efficient performers’, they could generate £400 billion of cash in total across Europe (equivalent to 30% of sales). For a breakdown of this improvement opportunity see table above.
- Even though there are significant improvement opportunities across all areas of Europe, the range of potential improvements is wide and ranges from 22% (UK & Ireland) to 40% (other southern Europe). It is not too surprising to see that northern European countries are at the lower spectrum of the improvement range, as traditionally working capital requirements are lower in these countries, predominantly driven by local business culture and different locally accepted payment terms.

Working capital levers for success

Although there is no ‘silver bullet’ to achieve good working capital performance, there are four key levers for success

- Commercial terms – High performing companies understand all terms in place, and match these terms with the size and nature of the contract. Often, there are established “preferred term” agreements in place which are based on specifically developed models and internal and external best practices.
- Process optimisation – Leading players understand each individual working capital process, and have tested and evaluated these through challenging the individual process steps with balancing the trade off between cash, cost and service.
- Compliance and monitoring – The most successful companies are measuring compliance to terms, processes, policies & procedures (for example on payment terms compliance is monitored through data analysis, with consequent root cause analysis to understand the key drivers for non-compliance). Consequently, the required changes to ensure compliance are analysed and valued by their potential cash impact. Working capital is monitored in detail via a key set of relevant operational and management KPIs.
- Cash culture & management - Cash is at the heart of high performing businesses, with top management sponsorship, clear accountability and responsibility for Working Capital performance and management. Also, cash forms an important part of performance measurement and incentives.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PricewaterhouseCoopers LLP

Mercredi 12 Septembre 2012