Since the middle of 2008, the industry’s landscape has been profoundly changed by the global economic downturn that highlighted the vulnerability of many industries and companies. Due to the crisis many of the traditional sources that defined the usual business have disappeared or provide very limited access, such as bank and other financial loans.
Given this situation, working capital management necessarily has become an acute focus for the businesses, which is now key for survival. Improved working capital management help companies releasing cash from working capital. Excess cash can be re-invested into the business, repaid to financing parties or simply distributed to the shareholders – just a few examples for improved corporate performance.
The working capital performance has deteriorated in CSE
Ernst & Young latest working capital management report revealed that companies in the Central and South European region experienced deterioration in working capital performance in 2011 compared with 2010, with the key measure of cash-to-cash (C2C) increasing by 12%, had the oil & gas sector excluded from the analysis, C2C would increase by 3%.
This year’s analysis shows that the 150 companies in the study still have an aggregate total of EUR 20 billion in cash unnecessarily tied up in working capital. This is equivalent to 8% of their sales, a similar figure to 12 months ago and additional EUR 2 billion is tied up in working capital compared to 2010 which means more than 10% increase. This means that on average there is an opportunity of cutting working capital by 8% of annual sales.
The weaker working capital performance (excluding the oil & gas sector) in 2011 was due to underperforming receivables and inventory management, which was partially offset by delayed payments to suppliers. Deterioration in receivables performance partly reflects the impact of worsening economic and credit conditions in some CSE countries during 2011.
Performance in the CSE region against the US and Western Europe
The study revealed that since 2005, the total reduction in C2C for CSE companies has been limited to 3%. Had the oil and gas industry been excluded from the calculations, C2C would have increased by 5%. These results mean that CSE companies have been significantly underperforming compared to their US and European peers – which reported a reduction in C2C (excluding the oil & gas sector) of 5% and 4%, respectively – compared to 2005.
Diverging working capital performance between CSE countries and that of Europe or the US may be heavily influenced by local payment practices, regulations and disparities in the levels of payment delays and defaults (and subsequently in provisioning and write-offs policies). But significant level of management focus on cash and process efficiencies in working capital management can be also observed between these regions.
What should management do?
Nowadays, management should challenge the way their organizations work to improve working capital management. They have to ask themselves if there is a cash culture within the organization, are there any tools and procedures in place to monitor working capital performance, do we have a system to follow up customer disputes and eradicate their root causes, do we have a focused collection strategy and do we monitor the level of early payments.
Perspectives for 2013
"The expected slight recovery of the European markets in 2013 may have controversial effects on working capital since increasing sales and earnings may decrease credit risk and the need for provisioing. Nevertheless financing the growth of the business and working capital puts additional pressure on the companies balance sheet. Considering the fact that lending criterias will not be eased in the short term and some countries may experiance further deleveraging, financing the growth of the business could be even more challenging. Under these circumstances, internal sources of financing such as releasing cash from working capital, deserves more attention," explains Lars Wiechen, Executive Director, Evalation and Business Modeling, Ernst & Young Romania.
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About Ernst & Young
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