27 Jun 2012 00:01
· Biggest UK companies have failed to release £248m cash each
· UK has biggest untapped cash source in Europe
· UK companies individually more efficient than continental counterparts
· Failure to release total of £400bn cash across Europe
· Southern Europe most inefficient managers of working capital
The UK’s largest companies have failed to free up £125bn of cash in total over the last five years due to inefficient working capital management, compared to £400bn across Europe, new PwC research shows.
Cash for Growth reveals that if all the UK companies currently in the bad performers category had improved and achieved the same level as the good performers, they could have potentially generated cash to the tune of £125bn – or 22% of sales. Individually, that means each large company could have generated a substantial average of £248m.
Across Europe as a whole, the least efficient companies could potentially have generated £615m per company on average - or £400billion in total (equivalent to 30% of sales). 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). Northern European countries are at the lower spectrum of the improvement range, as traditionally working capital is lower in these countries, predominantly driven by local business culture and different locally accepted payment terms.
Robert Smid, PwC working capital partner, said:
“Working capital presents a huge opportunity for companies to release cash from their balance sheets and operate more effectively. Managed well, it enables growth without additional funding requirements. Good performers are able to fund their own growth and release cash, while the bad performers have to find additional capital to fund their growth.
“Assuming the recession will eventually end, working capital performance is going to be crucial for companies wishing to fund their own growth. The working capital requirement in a growth period can actually be a multiple of sales growth, and having an adequate level of working capital often represents an additional challenge for growing businesses. Therefore, companies have to take extra care as the European economy enters a recovery.”
The survey, which looks at working capital as a percentage of sales performance of the largest 4000 companies in 34 European countries in the period between 2007 and 2011, splits them into the best performers and worst performers. It found overall that the companies that were most efficient at working capital management got better, and those that were least efficient got worse.
Typically, companies grow their working capital in line with sales. Despite a 40% sales growth, the survey found that on average, the good performers (i.e. top quartile, or top 25%), reduced their working capital by a much higher proportion of sales. In the UK, the best companies reduced their working capital by £140m on average. In contrast, the bad performers (the lower quartile, or bottom 25%) increased their working capital both in absolute and relative terms, equating to an average increase of £55m per company.
Differences between good and bad performance vary widely across the individual European countries. 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).
Simon Boehme, PwC working capital management senior manager, commented:
“Successful companies move away from short term year end window-dressing towards more sustainable levels of good performance, where every day key decisions are made with cash in mind. Put simply, those organisations with an embedded cash culture fare better.
“There is no silver bullet to achieving good working capital performance, but the key is to delve into the detail and small day-to-day operational activities. The route to successful management of working capital might sound like common sense, but in reality we often see half-hearted attempts at improving working capital which barely scratch the surface. This is largely due to the fact that companies either do not have the bandwidth or the resources, or they lack the necessary skills and technical expertise.
“Innovators who lead the field and constantly adapt to a new regulatory environment achieve significant reductions in working capital and will fare better in the upturn.”
The survey suggests that typically, the good performers are adept at managing four areas of their business effectively: commercial terms, process optimisation, process compliance and instilling a cash culture. In short, success comes to those organisations with an embedded cash culture and clear key performance indicators.
Notes to Editors:
1. PwC’s working capital team analysed the largest 4,000 European companies (with a turnover of over £150m) and looked at their respective working capital performance, in receivables, payables and inventories over a five year period.
2. Working capital was calculated as a percentage of sales.
3. Top performers are classified as the upper quartile (i.e. top 25%), and the bottom performers as the bottom 25% of the survey population.
4. The 34 European countries are grouped as 10 clusters:
· UK & Ireland
· Germany, Switzerland, Austria
· BeNeLux: Belgium, Netherlands, Luxemburg
· Nordics: Denmark, Finland, Norway, Sweden
· Spain & Portugal
· Other southern Europe: Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Greece, Macedonia, Montenegro, Slovenia, Turkey, Slovakia
· Central Europe: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
· Russia & Ukraine
4. Please go to www.pwc.co.uk/workingcapital
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