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REL Working Capital Survey 2016

European companies are struggling to register sustainable improvements in working capital performance, writes Neil Johnson

EUROPEAN companies are struggling to register sustainable improvements in working capital performance. Over the past nine years an average of only 12% of firms covered in REL’s annual working capital surveys achieved three years of consecutive gains.

This despite another improvement in 2015 in the cash conversion cycle (CCC), a measure that expresses the length of time it takes for a company to convert revenue into cash.


In 2015 CCC improved 1.7%, maintaining a trend in place since the global financial crisis. Performance drivers were improvements in receivables and payables processes.

Still, the opportunity in working capital across Europe amounts to a significant €981bn – €305bn in receivables, €328bn in inventory and €348 in payables.

Working capital in Europe is a rather muddled picture. Revenues are on the up – 2.0% in 2015 and 19.8% over five years – so too is the debt companies are carrying and the amount of cash they have on hand. Cash on hand rose 3% to €23.3bn in 2015, while debt has increased 40% since 2008, fuelled by low interest rates.

Yet, contrarily, companies aren’t hoarding cash, with both CAPEX and dividends up since 2008 – 9% and 25% respectively.

Rising debt levels alongside growing economic and political uncertainty make for uncomfortable bedfellows. European C-Suites need to take a look at the considerable opportunity in their working capital, in particular seeking improvements in inventory efficiencies, says Gerhard Urbasch, senior director at REL Consultancy.

“It seems that investment into IT and greater supply chain efficiency over the last 10 years has not paid off at all in terms of greater inventory efficiency, substituting inventory through information and better processes. What happened to the promise from the Lean revolution?”


Meanwhile, a performance split in cash conversion efficiency is opening up between the traditional economic powerhouses of Germany, the UK, Ireland and Northern Europe and countries such as Belgium, Spain, Portugal and even Greece.

“Much of the variation between countries can be explained by different sector mixes as well as payment cultures. There is, however, also an element of truly differing performances and attention to working capital and cash management that can be seen when comparing apples with apples. Southern European countries seem to have put most effort into ‘tightening the belt’ post-recession, while the UK, for example, has remained fairly flat and is in the minority of countries that actually deteriorated performance,” says Urbasch.

The question of Brexit

Despite poor performance in certain REL metrics, a PwC review over 10 years to 2015 was more positive, revealing a working capital opportunity of £28bn for 450 UK businesses. Meanwhile, after two years of positive performance, working capital fell year-on-year in 2015 by £14bn to £110bn. The UK’s performance outpaced those of global counterparts with less time spent on waiting for invoices to be paid and paying bills 16% lower than the global average – UK 36.6 days, global 43.4 days.

But with the UK an even smaller minority, having voted to leave the EU, what now for its working capital performance?

Learn lessons from the gains made post-financial crisis, says Daniel Windaus, working capital partner at PwC. “Cash trapped in working capital has risen in the years since, indicating that companies should revisit the improvements they made then to release more of this cheap cash source.”

Urbasch is a little sharper in his assessment of the situation: “UK corporates have been taken by surprise by the outcome of the referendum and they seem not to be prepared to deal with the risks that lie ahead. The UK companies in our working capital survey have more than doubled their debt from €200bn in 2005 to almost €500bn in 2015, leaving them with fewer options and flexibility in the face of increasing risk.

“EU-wide about one-third of corporate debt may be reduced by realising the roughly €1trn working capital improvement opportunity. With the clouds from Brexit, UK companies will not leave this money on the table and will work on improving their levels of working capital.”

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