Joint study with Creditreform shows: optimizing working capital management could free up EUR 115 billion in liquidity for German SMEs

• German SMEs need around EUR 50 billion in capital up to 2013 in order to finance growth
• Restrictive lending by banks and problems accessing new equity may result in liquidity bottlenecks and slower growth
• Major differences between sectors in terms of how long capital is tied up for – from 19 days in telecoms to 90 days in the clothing industry
• Large companies managed to cut the length of time capital is tied up for by 9 days between 2008 and 2010, SMEs by just 3 days
• SMEs could release EUR 115 billion in potential liquidity by optimizing working capital management

Economic forecasts for the coming years point to continuing growth in Germany. For the forecasts to come true, German small and medium-sized companies will need around EUR 50 billion in capital up to 2013. But restrictive lending by banks means that limited amounts of liquidity are on the table. Optimizing working capital management could be the answer for German SMEs, the key to releasing EUR 115 billion in untapped liquidity. These are the findings of a joint study by Roland Berger Strategy Consultants and Creditreform entitled "Cash for Growth". The study is based on data for the years 2008 to 2011 about liquidity management at more than 500 companies.

"Working capital management has improved considerably in most companies in recent years," says Roland Schwientek, Partner at Roland Berger Strategy Consultants. "But there is still considerable room for improvement. If companies could reduce even further the amount of time they tie up their capital for, they would be able to cover most of their financing needs themselves, making continued growth possible."

German SMEs need fresh capital

German small and medium-sized companies have a total liquidity requirement of around EUR 50 billion up to 2013. Of that, EUR 25 billion is needed to support revenue growth while the other EUR 25 billion relates to the increased length of time that their capital is tied up. "A company's inventories, cash reserves and receivables increase in proportion to its revenue growth," says Michael Bretz, Director of Economic Research at Creditreform. "If a company's capital tie-up time goes up, so does the amount of liquidity tied up, which in turn means that more liquidity is required."

Large companies tie up capital for less time

Capital tie-up times have improved slightly in Germany companies over recent years, especially for big companies. In 2009 the average time was 46 days for big companies, compared to just 43 days in 2010. However, German SMEs averaged 54 days in 2010, only a minor improvement on the 57 days in 2009. "Large companies have much more negotiating power and can impose favorable payment terms on their suppliers," says Schwientek. "Moreover, large companies have recognized more clearly the need to manage their working capital in a professional manner."

Conditions imposed by the lenders also play a role here. "In the case of large companies with well developed accounting systems, liquidity indicators often form a key element in the credit agreement, as in the case of covenants," says Bretz. "So it's hardly surprising that large German companies do much better than SMEs when it comes to the length of time for which their capital is tied up." This is particularly true for companies in the telecommunications industry: in 2010, average capital tie-up time was just 19 days. The next best-performing sector, trailing a long way behind, was retail, which achieved capital tie-up times of 43 days on average. "Improvements in how companies manage their receivables and above-average improvements in payables management are the key factors here," says Schwientek. The worst performers are companies in pharmaceuticals (86 days) and clothing (90 days). "The worst performers are so far behind the best performers chiefly because of their high levels of stocks and inventory," says Schwientek.

Current working capital management is putting recovery at risk

German companies need more liquidity for a number of reasons. First, they need capital to finance their own sales. But that's not all, says Bretz: "Often opportunities arise for attractive investments that require greater liquidity. Or companies need to adjust their financing structure following a period of recession. The problem is that companies' needs for large amounts of liquidity often coincide with a period of limited resources on the financial markets." Currently firms are having to deal with restrictive lending due to the stricter equity requirements placed on banks. The volume of financing available is shrinking and the costs rising. Plus companies are finding it tough to get their hands on external equity. The result? "Liquidity bottlenecks can put growth seriously at risk, especially for SMEs," says Schwientek. "Here, cash is king!"

Untapped liquidity potential of EUR 115 billion

To avoid growth being limited by a lack of liquidity, the experts at Roland Berger and Creditreform advise firms to optimize their management of working capital. By using their capital better, German SMEs could release around EUR 115 billion by 2013. "This extra capital would easily cover their financing needs of EUR 50 billion up to 2013," says Bretz. "If companies can cut capital tie-up times by 8%, the liquidity released will be enough to finance increased revenues of 10%," says Schwientek."The greatest potential for improving working capital lies in reducing stocks, followed by optimizing receivables management."