The credit crunch myth: Roland Berger Strategy Consultants/Creditreform study on working capital management shows German SMEs have huge untapped liquidity reserves

• Analysis of balance sheet indicators and payment data for 2,500 companies between 2006 and 2010 and conducted telephone interviews with over 300 top managers
• German SMEs will be up to EUR 60 billion short of liquidity by 2012
• Businesses can release untapped cash potential of about EUR 120 billion by actively managing stocks, receivables and payables. This is a viable alternative to new debt
• Businesses have reduced their tied-up capital considerably since 2006, but there is still a great deal of potential
• Food makers and trading companies tie their capital up the shortest, mechanical engineers and clothing manufacturers the longest

Many companies have depleted their liquidity reserves since the crisis; but they need to act if they are to keep up with demand as it recovers again. Acquiring debt in the credit market is not that easy, or cheap, right now. German SMEs will need around EUR 60 billion just to buy the additional raw materials, resources and capital equipment they need by 2012. So they will find working capital management, that is, managing their assets, receivables and payables, will become increasingly important. In their study of "Working capital and SMEs," Roland Berger Strategy Consultants and Creditreform looked at how 2,500 companies are managing their liquidity, and interviewed more than 300 managers to look at the results in detail. Conclusion: German SMEs may have caught up to a large extent, but the unused potential is still enormous. The resources companies need to safeguard their own liquidity, can often be found within the companies themselves. The untapped cash potential across all industries is approximately EUR 120 billion.

"Most businesses are already managing their liquidity much better since the crisis," says Roland Schwientek, Partner in Roland Berger Strategy Consultants' Operations Strategy Competence Center. "Our survey shows businesses brought their average capital tie-up time down from 64 days to 56 between 2006 und 2009." And the number of late payments has dropped too. Almost 40% of payments were late in 2007, today it's less than 20%. "This indicates businesses are managing their receivables more professionally, but also reflects the improving economy," says Dr. Carsten Uthoff, Creditreform's director. "Small and medium-sized companies are now much more aware of the idea of receivables management, and they are expecting much more of their customers."

There are still major differences between large companies and their smaller counterparts, however: large companies tie their capital up just half as long on average as small ones. "German SMEs still have a long way to go to catch up," says Schwientek. "Or, looking at it on the bright side: they still have enormous liquidity reserves. This is good news, especially at a time when SMEs are finding it harder to get outside financing, and a great deal of mezzanine finance will run out in 2011."

Big companies may have the upper hand when it comes to negotiating what they buy, but many smaller companies have not paid enough attention to the idea of working capital management so far. "This is something any company with sales of over EUR 200 million a year has constantly on the agenda – but micro-businesses ignore it almost completely," says Schwientek. "Today, large groups manage their liquidity professionally, using clear responsibilities, indicators and optimization initiatives. The classic SME, on the other hand, focuses only on sales and growth." SMEs will have to deal with acquiring liquidity more intensively in future. "How well their customers pay them is a major factor in how solvent they are themselves," says Dr. Uthoff of Creditreform.

Many SMEs tend to overestimate themselves

The study shows conditions vary considerably from industry to industry: food producers and paper manufacturers tie their capital up for the shortest time (26 days and 43 days, respectively), mechanical engineers (79 days) and clothing manufacturers (86) the longest. Even within an industry, there are huge variations in terms of how long businesses tie their capital up. Take mechanical engineering, for example: there are a number of companies who tie their capital up for just half the industry average, while the worst do so for up to six times as long. Taking all industries together, there is around EUR 120 billion in liquidity reserves going unused.

The study also shows that most SMEs think they are doing better at dealing with tying up capital in their business than the figures really show. Almost 90% of those surveyed thought their receivables management had improved considerably in the last three years, or was at least no worse than in 2007. Analyzing their balance sheet indicators, however, shows that is only true of two-thirds of SMEs – the remaining third have actually gotten significantly worse. "Businesses always start looking at how they manage their receivables relatively late in the day," Dr. Uthoff claims. "They need to integrate their procedures better to start profiting from their unused potential over the long term."

Many SMEs are interested in the opportunities of professionally managing their working capital, but often still do not use it. Just reducing the time they tie up capital by 5-10% can alleviate their overall financial requirements as much as increasing their sales by 10%, thus reducing their need to raise credit in the long term. The study shows that businesses that actively manage their liquidity have succeeded in reducing tied-up capital by 10% or more. "More and more SMEs are realizing how important active working capital management is, whatever industry they are in, even if just one-third of all businesses are pursuing the subject actively," says Schwientek. "You can release liquidity quickly and effectively by computerizing your receivables management, or reducing your stock levels by optimizing your order scheduling, for example. Screening your customers' creditworthiness will become more important in future," Dr. Uthoff concludes.