Bridging the gap: €237bn of additional working capital is needed to finance next year’s growth alone
September 07, 2015
Our 2015 Annual Working Capital Survey has revealed that for the first time since 2010, working capital has shown significant improvement globally, as companies are waking up to the importance of cash vs profit. This improvement contributed to a jump of 11.3% in the cash-on-hand of companies in our survey. However, companies will need an additional €237bn to enable next year's growth alone. So, there still is a significant gap to bridge.
Our analysis reveals that companies can release more than €950bn of cash if working capital under-performers improve to the next quartile.
So where are the gaps?
Small enterprises vs the larger corporates
In 2010, the gap between working capital levels of large corporations and small enterprises was only 7.6 percentage points. Over the following five years, this gap has widened to 10.6 percentage points. Whilst large corporates have improved their working capital performance, small enterprises have experienced a sharp deterioration. In the same comparison, large companies were able to generate more cash from operations, partially driven by their lower working capital funding requirements. Small enterprises have to rely more on external debt to close their funding gap and combined with their comparatively higher interest rates, they are placed at a competitive disadvantage. Addressing their working capital inefficiencies could generate the cash required to break this cycle address the disadvantage.
Regional performance
The research uncovered that out of the top three regions, Asian companies have the highest net working capital (NWC) % and the worst cash conversion efficiency (CCE), as their working capital performance deteriorated the most in the last 5 years. This is a common trend for companies with relatively high working capital, as most of their cash needs to be reinvested in the business to enable growth. USA/Canada tops the chart for working capital performance, as well as in their ability to generate cash from operations. This is closely followed by Europe.
Sector performance
Only 7 out of 16 sectors actually managed to improve their working capital since 2010, but to such an extent that they compensated for the performance gap of the other sectors. Our analysis also shows a wide spread in NWC % between top and bottom quartile performers within each sector. This gap in performance is also reflected in the ability to convert profit into cash, consequently bottom performers have a higher need for external funding to run their day-to-day business. On average they have a 50% higher debt/EBITDA ratio.
View our website to see the full survey report
What challenges have you had with working capital? As a percentage of turnover, how much cash could you release through increased efficiency? Share your thoughts via the comments box below or if you’d like to discuss your situation confidentially, feel free to set up a meeting.
