E&Y's Working Capital Management report

Up to $1,000bn tied up inworking capital, says survey

By Richard Milne in Paris

Published: June 16 2009 03:00 | Last updated: June 16 2009 03:00

Big companies in Europe and the US have up to $1,000bn in cash tied up needlessly in working capital, says a report today.

The report by Ernst & Young highlights how an increasing number of companies are failing in the fight for cash unleashed by the global crisis to tap possible improvements in their working capital.

The management of working capital by changing payment terms to suppliers or from customers as well as cutting inventory has become central to many companies' focus on a "cash is king" strategy.

But they are still missing out as the number of companies improving fell at the end of last year.

"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 $1,000bn is equivalent to 6 per cent of sales for these businesses," said David Sage, a partner for working capital management at the accounting firm.

Of the 2,000 companies surveyed, only 43 per cent reported improved working capital performance in the final quarter of last year compared with 63 per cent in the US and 50 per cent in Europe for the full year.

Similarly, the cash-to-cash cycle, which measures how long companies need to finance themselves as they wait for payment from customers after paying suppliers - deteriorated in the fourth quarter. It fell 7 per cent in the US and 3 per cent in Europe in spite of the full-year figures showing an improvement.

Steve Payne, a partner at Ernst & Young, pointed to the volatility in currency and commodity prices as a factor as well as the depth of the recession.

"Companies should pay more attention to working capital management when planning and executing their responses to a more challenging environment," Mr Payne said.

The report also underlined how companies had failed to cut inventory as fast as demand dropped.

Companies have been caught out by the speed of the plunge in demand and experts believe that could complicate the recovery as they struggle to react.

Ernst & Young estimates that companies that take a structured approach to improving working capital can improve their liquidity by 5 per cent of their annual sales. It recommends companies change their bonus schemes to reward improvements in cash performance and to modify payment terms for customers and suppliers where necessary.

Squeezing suppliers has proved a popular but contentious form of improving working capital. Companies such as Tesco and Mars have increased their payment terms to suppliers, often doubling the amount of time to pay them. Some suppliers have complained they have got into financial difficulties because of it and supply chain experts say this makes them less co-operative if they survive the recession.