REL’s annual survey of working capital management (of 960 companies) in Europe showed that 2015 performance was OK with a small reduction in CCC (1.7%), but:

• there was still “a trillion EUR on the table” as overall, Europe’s largest and most sophisticated companies have an opportunity to release nearly one trillion euros (€981 billion) now tied up in working capital
• better management could produce significant benefits in each area of working capital (payables, €349 billion; inventory, €328 billion; and receivables, €304 billion).

Sustaining working capital programmes

Sustaining working capital management programmes is a major problem throughout Europe with:

• only 13.2% of the companies surveyed managed to sustain improvement in their cash conversion cycle for three years in a row
• 9% suffered deteriorating CCC performance for three years running
• cash conversion efficiency (CCE, which measures operating cash flow/revenue) showed only marginal improvement for third year in a row. And CCE is still down 3.4% from where it was five years ago, and the average European firm has yet to recover to its 2009 position.

The dangers from bad habits

Low interest rates are causing bad habits to emerge, just as in the USA:

• European companies that added 50% or more to their debt in 2015 suffered a 20% increase in their cash conversion cycle
• some companies now have above average higher overall debt and lowere average cash in hand, making themselves much more vulnerable in the event of a major shock or disruption to their business.

These bad habits are worrying REL. In the current European market, they believe, “With the ongoing uncertainty that seems likely to follow the Brexit crisis and no guarantee that interest rates will remain low, 2016 may be a particularly opportune time for companies to reduce borrowing and concentrate on generating cash.”

The dangers from general working capital surveys

Infomita’s Brian Shanahan believes that, “the headline value of working capital locked up is wrong because:

• firstly, comparing different companies stock balances is a very tricky thing to do when there are multiple products being made with very different manufacturing cycles
• second, the payables numbers in these surveys is also distorted since many large corporates (especially in the US) are running SCF schemes. This will make the payables balance appear much larger than it really is and masks the opportunities available in managing receivables.” 

He concludes that, “At best, the numbers can only be directionally correct.”

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CTMfile take: Although the numbers in this type of survey, can only be directionally correct, it is clear that sustaining working capital management programmes through economic and market cycles seems to be one of the most difficult things to achieve in cash and treasury management. What do corporates need to do to make this happen? Who should lead these programmes?