European Working Capital Study - PwC · PDF fileAs our annual European working capital survey, this study, has ... that this is not necessarily the case. Year-on-year comparison Average

European Working Capital Study

www.pwc.com

January 2011

European Working Capital Study

January 2011

European Working Capital Study 1

Thomas Doll Partner System & Process Assurance Services

For this purpose, we have analysed working capital performances across 12 European countries, compiling annual reports from over 1200 publicly listed companies. The sample included a balanced portfolio of corporates coming from 10 different sectors.

Furthermore, we have also analysed the link between working capital levels and profitability, as measured by return on net assets (RONA).

The main results of the study show deteriorations in working capital across many sectors over the last year. Particularly in inventory, where we would have expected reductions in our last year’s study, we have again seen deteriorating performances.

Introduction

As we are seeing positive signs indicating the end of the crisis, liquidity and cash management are still very high on the agenda for most corporates. Over the course of the last year, many CFOs and finance executives have confirmed us that initiatives have been launched to address challenges. So, what impact did these have?

As our annual European working capital survey, this study, has tried to confirm this commitment with year-end figures.

Having an insight on how peers are managing their working capital provides companies a better understanding of their current performances and what potential untapped source of liquidity still is available.

2 European Working Capital Study

1Much talk, little improvement

For the first time since 2005, European companies show deterioration on overall working capital levels, caused by all three areas equally.

Working capital rations of the sampled companies have deteriorated by 0,4% compared to last year.

Despite much attention on cash and liquidity, the crisis had a negative impact on the net working capital of the largest listed companies in Europe.

2Pharmaceuticals best, Oil&Gas worst change

Industries with the biggest year on year improvements have been pharmaceuticals and retail.

Biggest deteriorations in working capital performance show in oil & gas and basic material producing companies.

3Potential of reducing over 30% of working capital

Total excess working capital levels represent €475bn for the top European companies.

Moving to the upper quartile working capital levels of their respective sector, the biggest European companies could liberate over 30% of their net working capital.

4Working capital plays its part on improving profitability

Reductions in working capital still have a significant impact on the profitability of corporates.

While margins have decreased over the last years, working capital optimisation still holds an untapped potential with impact on profitability.

Key findings


Over the course of last year, many finance executives we spoke with indicated that working capital is a strategic priority to improve liquidity levels. What has been the result?

While over the last 5 years, European companies were able to improve overall working capital levels, 2009 shows a break from this trend.

Companies have on average 20,8% working capital in relation to their annual turnover, which represents an average increase of 0,4% compared to 2008.

This evidences that the crisis has heavily challenged the liquidity positions of many corporates, even large listed ones.

Year-on-year comparison

Promises, promises? For the first time since 2005, European working capital levels deteriorate.

20%

21%

22%

23%

24%

2005 2006 2007 2008 2009

European average working capital ratio

Working capital ratio defined as net working capital/annual turnover


Biggest improvements have been noted for corporates in Spain (-1,3%), where like France (-0,8%) government regulations on payment terms have been implemented, which have potentially increased awareness on managing cash.

Despite the common belief that countries with traditionally longer payment terms carry higher levels of working capital, the data shows that this is not necessarily the case.


Average increase by 0,4% compared to 2008. However, differences were noted in the country performances.

Average working capital ratio by country

0% 5% 10% 15% 20% 25%

Turkey

Poland

Sweden

Finland

Italy

Germany

UK

The Netherlands

Switzerland

France

Belgium

Spain -1,3%

-1,1%

-0,8%

-0,4%

-0,3%

+0,1%

+0,1%

+0,2%

+0,6%

+1,1%

+2,9%

+3,1%

2008 2009

Imp

ro

ve

me

nts

De

ter

ior

ati

on

s


The average European cash-to-cash cycle for 2009 shows a clear break with the trend of improved cash conversion. For the first time since 2005, the conversion cycle increases by 1,5 days to 76,0 days on average. Surprisingly, receivables, payables, and inventory all show equally minor deteriorations:

• Despite promises to achieve lean inventory levels, it is surprising to see the DIO continuing its 5year trend of deterioation.

• Receivables have been in focus in 2008, and have made no significant change in 2009.

• The stagnation of the DPO is possibly due reaching the end of quick win optimisations.

Last year’s study concluded that substantial improvements would come from better managing the forecast-to-fulfil cycle, we believe this is still valid today, especially in the long-term.


Overall European cash conversion cycles have increased by 1,5 days. Deteriorations have been seen in all three areas.

Average evolution of C2C, DSO, DPO and DIO

2005 2006 2007 2008 2009

DSO DPO DIOC2C

Da

ys

-51,5 -50,7 -51,6 -51,2 -50,8

46,6 45,3 46,6 47,4 47,8

84,9 82,7 82,0 78,4 79,0

80,0 77,3 77,0 74,6 76,0

-100

-50

0

50

100

150

200

250


A sector comparison shows the two distinct extremes: those with relatively very little stock-holding and/or cash receivables, such as Services or Retail; and those with more significant inventory and/or longer and more complex supply chains, such as Pharmaceuticals or Manufacturing.

With an increasing focus on cash and cost reduction, European pharmaceutical companies were able to make the biggest relative improvements, with 1,2%, but only back to their 2006 levels.

Biggest relative deteriorations have been noted for Oil & Gas and for Basic Material companies, with 3,6% and 2,2%, respectively. This is largely due to the price volatility in 2008 leading to high levels of sales during 2008, and due to the prices decreases towards the year-end. In 2009, working capital levels have come back to their levels of 2006-2007.

Sector comparison

Pharmaceutical and retail companies have made the biggest overall improvements.

European working capital ratio per industry

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009

Services

Oil & Gas

Retail

Telecommunication

Utilities

Manufacturing

Consumer goods

Pharmaceuticals

Technology

Basic materials


Comparing the overall cash-to-cash cycle across sectors evidences the differences in underlying business models.

Pharmaceutical companies have with 93 days the longest cash conversion cycle. Historically, research-based pharmaceutical companies have not focused rigorously on cash management, as the industry enjoyed high operating margins and strong balance sheets. As a result, a cash culture has been far from prevalent.

Biggest changes compared to last year have been Oil & gas and basic material companies with longer cash conversion cycles by 13 days and 8 days respectively.

Sector comparison

Oil & Gas and Basic material companies show biggest deteriorations with 13 days and 8 days of their C2C cycle.

Cash-to-cash cycles by sector (2009)

0

20

40

60

80

100

120

DSO DIO DPO C2C

Retail Telecom. Utilities Consumergoods

Basicmaterials

Manufacturing

PharmaceuticalsServices

Oil & Gas

Technology

Da

ys


Although in some sectors the management of working capital is improving, we can see within industry sectors significant improvement potentials. For example, well-performing consumer goods companies require nearly three times less working capital as their lower performing peers.

Our analysis showed that the top 1200 European listed companies have over €475 billion Euros unnecessarily tied up in working capital. The basis for this calculation are actual 2009 figures compared to the upper quartile of their respective peer group.

Sector comparison

European companies carry over €475 bn excess cash in working capital.

Working capital ratios per industry

SectorNumber of companies

Lower quartile

MedianUpper

quartile

Difference upper to lower

quartile

Consumer goods 247 32,0% 21,0% 12,1% 19,9%

Manufacturing 375 34,0% 22,8% 14,3% 19,7%

Services 147 18,3% 9,1% 0,8% 17,5%

Pharmaceuticals 97 32,4% 24,0% 14,9% 17,5%

Utilities 51 24,0% 12,7% 6,6% 17,4%

Telecommunication 61 19,4% 10,8% 3,0% 16,4%

Technology 58 25,8% 19,1% 12,3% 13,5%

Basic materials 94 30,9% 22,9% 17,4% 13,5%

Retail 66 14,8% 9,0% 2,7% 12,1%

Oil & Gas 27 20,2% 11,5% 8,4% 11,8%

On average, companies could improve over 30% of their current working capital level, representing on average €389m.


The crisis has increased the pressure on margins in all sectors, and has forced companies to make sustained efforts on efficiency and operational excellence.

Therefore, companies should maintain an emphasis on working capital optimisation, to also capture an important upside potential through this factor. For example, by moving to the upper quartile,

Technology companies can improve their RONA by 1,6%, which would require an equivalent improvement in NOPAT of 10%.

Working capital and profitability

Profit impact simulation by industry

Sector WC ratio-median (%)

WC ratio upper

quartile

WC improvement (€m)

Impact on RONA (%)

Equivalent NOPAT improvement (%)

Retail 9,0% 2,7% 548,9 1,6% 14,1%

Technology 19,1% 12,3% 36,7 1,6% 10,0%

Services 9,1% 0,8% 195,8 1,7% 9,5%

Manufacturing 22,8% 14,3% 180,2 1,3% 9,4%

Consumer goods 21,0% 12,1% 440,7 1,3% 9,2%

Pharmaceuticals 24,0% 14,9% 261,3 1,6% 7,1%

Telecommunication 10,8% 3,0% 661,4 1,1% 5,7%

Basic materials 22,9% 17,4% 169,1 0,5% 4,1%

Oil & Gas 11,5% 8,4% 668,4 0,6% 3,6%

Utilities 12,7% 6,6% 737,6 0,6% 3,5%

Potential impact on profitability.


Main conclusions

Whilst we would have expected that the continued attention on working capital management would have translated into further improvements of the financial results of 2009, the figures actually show the opposite.

The potential reasons are threefold:

1. For one, against the backdrop of a crisis, these findings must be put into the context of scarce liquidity, where many companies have felt the pressure from suppliers, and the need to chase and tighten their grip on customers.

2. Secondly, improvements from initiatives might not have materialised yet in the year-end figures.

3. Thirdly, some companies might have not tried hard enough to realise improvements.

Nevertheless, funding through internal sources still remains one of the cheapest sources of financing for any corporate.

The results indicate that there is clearly still some room for improvement left on the table. Even companies that have made initial progress, once management was able to realise the quick fixes, it will need to consider the following questions:

Conclusions

How do we get this into the DNA of the organisation and make it business as usual?

How do we get from top-of-average to being best-in-class?


Most companies can set free significant amounts of cash locked up in their business operation and sustainably increase their profitability and company value by managing more actively their working capital. To support our clients in this venture we have set up an network of working capital excellence experts in the System & Process Assurcance (SPA) service line. In SPA we combine a holistic end-to-end process understanding with a comprehensive in depth IT-system knowlegde to deliver high quality Business Process Assurance & Optimisation Services (BPA&O). Integrated part of our methodology is a benchmarking suite to answer e.g. the following questions:

• Do you know your amounts of cash locked up in your business operation?

• Do you know how efficiently your peers managing working capital and their underlying systems & processes?

• Do you know what are the value drivers to achieve working capital excellence?

European network of system and process assurance experts

Belgium

Germany

United Kingdom

Netherlands

Finland

Norway

Denmark

France

Spain

AustriaSwitzerland

Italy

Turkey

Sweden

Dedicated Working Capital team

Your local contacts

Thomas DollTel.: +49 69 [email protected]

Timo LaborgeTel.: +49 201 [email protected]

Kai VogelerTel.: +49 40 [email protected]


Appendix – Survey scope

The purpose of this study is to show drivers and barriers as well as keys to success in the management of working capital performance across a number of European countries. The survey is compiled of annual reports from over 1200 publicly listed companies in twelve countries.

Population distribution by country

Population distribution by industry

9%

6%6%

11%

11%

9%

7%8%

7%

9%

9%

8%

Belgium

Finland

France

Germany

Italy

The Netherlands

Poland

Spain

Sweden

Switzerland

Turkey

UK

Basic materials

Consumer goods

Manufacturing

Oil & Gas

Pharmaceuticals

Retail

Services

Technology

Telecommunication

Utilities

8%

20%

31%2%

8%

5%

12%

5%5%

4%


Basis of calculations

For this study, we have excluded out of the sample of listed companies financial institutions, insurance companies and real estate companies, as these have different working capital requirements.

For our calculations, we have used the key ratios based on annual turnover, mainly for consistency reasons to exclude differences in reporting.

DSO (days’ sales outstanding) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO value means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company takes longer to collect money. It is calculated as follows: (total receivables/revenue * 365).

DPO (days’ payables outstanding) is an indicator of how long a company takes to pay its trade creditors. It is calculated as follows: (total payables/cost of goods sold * 365).

DIO (days’ inventories outstanding) gives an idea of how long it takes for a company to convert its inventory into sales. Generally, the lower (shorter) the DIO, the better. It is calculated as follows: (total inventories/cost of goods sold) * 365.

Cash-to-cash cycle = DSO + DIO - DPO

RONA (return on net assets) is equal to asset turnover (revenue/net assets) multiplied by return on sales (NOPAT/Revenue). A strong virtue of using RONA compared to traditional methods for measuring company performance is that RONA also includes the assets used by a company to achieve its output.

Working capital ratio = net working capital/revenue.

Limitations of this study

Companies have been assigned to countries based on the location of their headquarters. Although a significant part of sales and purchases might be realised in that country, it does not necessarily reflect typical payment terms or behaviour in that country.

As the analysis has only used public information, all figures are financial year-end figures. As such, typical management efforts at year-end known as ‘window dressing’ – bias real working capital requirements within reporting periods. Other off-balance-sheet financing, or the effects of asset securitisation, such as receivables securitisation of similar effect, have not been taken into account.

There can be a significant time-lag between the implementation of improvements in working capital and their full realisation and visibility in the financial statements.

Appendix – Basis of calculations & limitations


Appendix – Sampled companies by industry and country

Bel

gium

Finl

and

Fran

ce

Ger

man

y

Ital

y

Net

herl

ands

Pola

nd

Spai

n

Swed

en

Swit

zerl

and

Turk

ey

UK

Tota

l

Industry description

Manufacturing 25 32 39 43 26 27 41 22 25 51 27 17 375Manufacturing of industrial goods, such as aerospace

Consumer goods 11 12 25 27 20 19 21 16 25 14 43 14 247From clothing and footwear to household and personal products

Services 11 5 20 13 17 11 9 11 11 14 8 17 147Both industrials and consumer services

Pharmaceuticals 8 2 12 12 8 4 4 9 13 15 3 7 97All pharmaceutical products

Technology 5 8 5 6 7 4 9 1 8 1 1 3 58

Manufacturing of electronics, creation of software and computers or products relating to information technology

Basic materials 4 5 6 12 6 6 6 6 7 4 21 11 94

Includes the mining and refining of metals, chemical producers and forestry products

Telecommunications 6 5 7 5 4 1 5 6 6 6 5 5 61Telecommunications and media

Retail 4 2 11 8 4 6 6 8 4 4 9 66Primarily food retailers, excluding apparel

Utilities 4 1 6 7 13 1 7 1 4 2 5 51Mainly electric and water firms

Oil & Gas 1 3 1 4 2 2 3 2 2 2 5 27 Oil & gas companies

Total 78 73 134 134 109 80 104 81 106 115 116 93 1.223


Bel

gium

Finl

and

Fran

ce

Ger

man

y

Ital

y

Net

herl

ands

Pola

nd

Spai

n

Swed

en

Swit

zerl

and

Turk

ey

UK

Manufacturing 83,2 65,4 89,1 80,6 113,7 79,4 84,6 110,8 67,1 71,4 101,8 71,1

Consumer goods 55,1 64,0 77,6 59,7 101,2 55,8 65,8 69,0 62,5 59,6 101,6 48,2

Services 107,1 65,1 86,4 63,3 101,0 64,2 78,4 82,3 64,7 66,8 95,8 51,7

Pharmaceuticals 91,2 52,6 71,6 97,6 104,6 67,0 88,6 84,6 76,8 75,1 86,6 89,7

Technology 84,4 91,9 87,6 87,7 150,6 78,0 113,2 202,4 101,2 21,8 78,2 84,5

Basic materials 60,3 61,6 79,6 58,2 80,8 60,0 116,1 99,3 62,8 57,0 81,9 65,8

Telecommunications 65,5 62,3 134,5 42,8 113,6 51,9 71,9 115,2 86,1 62,6 105,5 46,6

Retail 25,7 33,6 35,8 18,5 101,3 10,3 34,2 0,0 27,2 39,1 19,8 18,8

Utilities 63,4 65,9 119,9 112,6 142,4 0,0 257,3 135,5 75,4 120,4 113,6 46,2

Oil & Gas 0,0 27,1 98,4 54,1 77,0 50,1 61,4 89,7 84,5 50,5 23,2 105,9

DSO - average per sector and country

Bel

gium

Finl

and

Fran

ce

Ger

man

y

Ital

y

Net

herl

ands

Pola

nd

Spai

n

Swed

en

Swit

zerl

and

Turk

ey

UK

Manufacturing 58,2 33,5 60,6 41,0 78,6 55,4 50,4 91,7 42,4 31,6 59,8 39,0

Consumer goods 45,6 27,0 53,4 30,0 80,8 47,7 54,6 67,6 35,0 29,2 55,4 40,2

Services 56,4 27,2 67,1 45,7 99,4 33,8 64,6 102,5 33,7 29,7 60,2 30,9


Technology 68,1 53,2 42,0 21,0 91,1 17,4 50,4 147,1 24,3 18,5 89,7 12,6

Basic materials 50,0 46,2 52,3 30,5 63,1 51,2 63,2 77,4 30,8 32,5 36,9 30,4


Retail 35,0 25,9 46,6 40,5 90,1 30,4 48,1 0,0 28,9 29,8 69,1 34,8

Utilities 62,6 21,2 93,5 60,0 91,4 0,0 51,0 107,6 32,3 48,8 42,6 27,7

Oil & Gas 0,0 21,8 62,8 28,4 54,9 33,0 52,9 106,9 41,1 29,6 29,0 36,9

DPO - average per sector and country


Bel

gium

Finl

and

Fran

ce

Ger

man

y

Ital

y

Net

herl

ands

Pola

nd

Spai

n

Swed

en

Swit

zerl

and

Turk

ey

UK

Manufacturing 51,6 59,6 57,1 67,4 75,0 62,2 54,2 67,7 57,9 57,3 58,6 45,5

Consumer goods 51,6 55,3 61,3 51,7 70,0 53,0 59,2 72,5 62,1 70,7 63,0 50,9

Services 28,4 13,7 9,4 31,0 15,3 11,8 16,1 16,3 26,3 21,6 37,7 11,0


Technology 47,4 19,5 8,5 5,6 33,1 3,2 25,8 28,7 17,7 20,3 47,0 1,2

Basic materials 64,5 55,8 58,1 54,5 65,1 62,0 53,2 64,4 67,8 84,8 57,7 50,2


Retail 23,0 24,7 43,2 58,1 60,0 40,0 54,9 0,0 51,5 47,5 51,4 33,0

Utilities 30,3 30,0 56,9 16,5 13,6 0,0 132,3 25,9 67,1 9,1 15,3 4,4

Oil & Gas 0,0 43,5 21,3 46,4 33,7 19,0 53,4 21,2 8,8 27,3 18,1 28,9

DIO - average per sector and country

© PricewaterhouseCoopers, January 2011

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Your local contacts

Thomas DollOlof-Palme-Straße 3560439 Frankfurt am MainTel.: +49 69 9585-1343Mobil: +49 [email protected]

Timo LaborgeFriedrich-List-Straße 2045128 EssenTel.: +49 201 438-1265Mobil: +49 [email protected]

Kai VogelerNew-York-Ring 1322297 HamburgTel.: +49 40 6378-1835Mobil: +49 [email protected]

Documents

European Working Capital Study - PwC · PDF fileAs our annual European working capital survey, this study, has ... that this is not necessarily the case. Year-on-year comparison Average