$1 trillion still tied up in working capital among leading corporations - Ernst & Young - Global

London, 17 June 2009 — Up to US$1 trillion of liquidity could still be tied up in working capital among the leading corporations in the US and Europe, according to a new report by Ernst & Young.

All tied up (pdf, 8.8mb), a report on the working capital performance of the 2,000 largest companies by sales, headquartered in the US and Europe, also finds that the proportion of companies reporting improved working capital performance fell to only 43% for each region when the last quarter of 2008 and 2007 were used as a basis for comparison (by contrast, 63% of the companies in the US and 50% of those in Europe reported lower levels of working capital in 2008 compared with 2007).

David Sage, partner for working capital management, at Ernst & Young LLP (UK), says:
“Despite a much stronger focus on cash, the findings indicate plentiful opportunities for many companies to release additional liquidity from working capital. The amount of US$1 trillion is equivalent to 6% of sales for these businesses. In other words, for every US$1 billion in sales, the opportunity for working capital improvement is, on average, US$60 million.”

For the full year 2008 compared with 2007, the cash-to-cash (C2C) cycle improved by as much as 7% in the US and 6% in Europe. However, using the last quarter of the year as a basis shows a radically different picture, with a year-on-year deterioration of 7% in the US (and 3% in Europe for the companies reporting quarterly sales).

Steve Payne, Americas leader for working capital management, at Ernst & Young, says:
“The sharply contrasting results in working capital performance for the full year and last quarter in both the US and Europe, partly reflect the impact of the global downturn in the final quarter of 2008, further compounded by heightened volatility in currency and commodity prices around the world.”

In particular, inventory levels increased significantly in both the US and Europe (up by 10% and 4% respectively in the final quarter of 2008).

“Inventories did not decrease at the same rate as the drop in demand since companies’ supply chains were not responsive enough to keep pace,” continues Payne.

Cash flow pressures 
“In the short term, we expect that the continuation of such a tough environment will further intensify the pressure on companies’ cash flow and working capital in particular,” says Sage. “This scenario may result in a wider divergence of working capital performance between companies, with those excelling in this area could be less adversely affected than their peers.”

Effective working capital management strategy
“Companies should pay more attention to working capital management when planning and executing their responses to a more challenging environment,” says Payne. “For an organization, such a strategy offers the opportunity not only to improve cash, cost and service, but also to be more agile and flexible”.

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