Poor Working Capital Management Costs Europe’s Major Companies £400bn, Finds PwC Survey
The UK’s largest companies have failed to free up £125bn (US$194bn) of cash over the last five years due to inefficient working capital management, compared to £400bn across Europe as a whole, according to research by PricewaterhouseCoopers (PwC).
PwC’s report ‘Cash for Growth’ states that if all the UK companies currently in the bad performers category had improved and achieved the same level as the good performers, they could have potentially generated cash to the tune of £125bn or 22% of sales. Individually, that means each large company could have generated a substantial average of £248m.
The survey studied Europe’s largest 4,000 companies with a turnover of more than £150m. It found that across Europe as a whole, the least efficient companies could potentially have generated £615m per company on average, or £400bn in total, which is equivalent to 30% of sales.
Although there are significant improvement opportunities across all areas of Europe the range of potential improvements is wide, ranging from 22% (UK and Ireland) to 40% (southern Europe). Northern European countries are at the lower spectrum of the improvement range, as traditionally working capital is lower in these countries, predominantly driven by local business culture and different local payment terms.
“Successful companies move away from short term year-end window dressing towards more sustainable levels of good performance, where every day key decisions are made with cash in mind,” said Simon Boehme, PwC’s senior manager for working capital management. “Put simply, those organisations with an embedded cash culture fare better.”
Robert Smid, PwC working capital partner, added: “Working capital presents a huge opportunity for companies to release cash from their balance sheets and operate more effectively. Managed well, it enables growth without additional funding requirements. Good performers are able to fund their own growth and release cash, while the bad performers have to find additional capital to fund their growth. Assuming the recession will eventually end, working capital performance is going to be crucial for companies wishing to fund their own growth. The working capital requirement in a growth period can actually be a multiple of sales growth, and having an adequate level of working capital often represents an additional challenge for growing businesses. Therefore, companies have to take extra care as the European economy (eventually) enters a recovery.”