REL, part of the Hackett Group, report in their ‘2015 Europe Working Capital Survey’ that, “In Europe, the cash conversion cycle (CCC) in 2014 improved 5.5% (2.1 days). Having levelled off from 2011 to 2013, working capital performance is again progressing, continuing the positive trend seen since the last recession – with 2014 performance demonstrating an 18.5% improvement in the CCC compared to 2007 levels.”

However, “European companies have demonstrated cash release through operational efficiencies, but at the same time have increased debt levels (40% increase to 2007), mirroring the trend to take advantage of low interest rates”, see figure below.

Post-recession European companies fund growth through debt and operational cash

Source & Copyright©2015 - REL

REL also found that companies with large debt have worse cash management performance, as figure below shows:

Source & Copyright©2015 - REL

REL believe this raises important questions for corporate treasurers as % rates start to rise. whether companies:

• are prepared for an increase in interest rates
• are proactively managing the level of debt to prepare for the rise?

Future development

As in all REL studies on working capital, they point out that sustainability remains a challenge. There is evidence of emerging cash awareness. Working capital is a corporate focus for 124 companies (13%) that have managed to improve their cash conversion cycle every year for three years. However, as the time frame increases, the number of organisations maintaining those improvements substantially decreases, see figure:

Source & Copyright©2015 - REL 

Importantly REL point out that while CCC needs to be lower, it also has to be optimal for the type of business. Readers can compare their performance in tables on the CCC for the main industry groups

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CTMfile take: Increased debt levels could be a major problem for some corporates as interest rates rise? The REL reports on working capital performance are required reading where readers can compare their performance with the best and worst in their industry. See: Europe report and USA report.