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Study on working capital management

Stuttgart/Munich, June 29, 2009

Roland Berger Strategy Consultants study on working capital management: Optimizing current assets helps tap into cash potential and build buffers against insolvency

  • Our study entitled "Working capital – Cash for recovery" looks at 216 European companies with total sales of EUR 3,700 billion and total EBIT of EUR 422 billion
  • Presently, the insolvency risk is increasing as higher cash requirements coincide with reduced cash supply and high financing costs
  • Internal sources of finance are becoming more interesting: one of the main lever is tapping into the cash potential in working capital
  • The companies surveyed had a combined potential of EUR 353 billion in Q1 2009, roughly one third more than in 2008
  • Relative to tied-up working capital, utilities and engineered products companies have the greatest cash reserves hidden in their working capital

In the current economic situation, companies are facing a higher risk of insolvency. On the one hand, they need more cash; on the other, lenders are more tightfisted than usual and the financing costs are higher. In its study entitled "Working capital – Cash for recovery", Roland Berger Strategy Consultants has analyzed 216 European companies by taking a close look at their internal sources of finance. The result? At the moment, releasing the cash reserves hidden in working capital offers the greatest potential for improving liquidity. According to the Roland Berger experts, the companies surveyed had a total cash potential of EUR 353 billion. This turned out to be especially true for utilities and engineered products companies.

"In the current recession, working capital is emerging as a key source of internal finance," says Roland Schwientek, Partner at Roland Berger's Operations Strategy Competence Center. Increased cash requirements and a reduced cash supply with higher financing costs combine to increase the likelihood of insolvency. In their study called "Working capital – Cash for recovery", the experts highlight alternative sources of internal finance: "As some traditional sources of cash have dried up, the most promising solution is to tap into the liquidity potential hidden in working capital," says Schwientek. According to the experts, internal finance based on optimized working capital is much more effective than external finance. Even small improvements in receivables, inventories and payables can generate significant reductions in external finance requirements.

Survey of 216 European companies

The survey was based on an analysis of 216 European companies from key industry sectors, such as automotive, chemicals & oil, consumer goods & retail and pharmaceuticals. The companies surveyed achieved combined sales of EUR 3,700 billion and total EBIT of EUR 422 billion or some 30% of the gross domestic product generated by the EU25.

According to the Roland Berger experts, the companies surveyed had total cash potential of EUR 353 billion in the first quarter of 2009. The previous study conducted in 2004 had revealed no more than EUR 193 billion. Despite the financial crisis, the cash potential was also up a full 32% year on year. At 41%, payables offer the greatest potential, followed by receivables (37%) and inventories (22%).

Significant differences between industries

In terms of working capital tied up, utilities and engineered products companies have the greatest potential. Average net working capital days are the lowest in telecommunications and the highest in the airline industry. The mining and automotive industries are leaders in receivables management, while the construction and telecommunications sectors come out on top in inventory management. The telecommunications, construction and utility industries lead the way in payables management.

Success factors for sustainability

There are a number of success factors that help ensure the sustainable success of working capital projects. Roland Berger offers a comprehensive toolset (Cash Navigator, "Bible of Levers" toolbox, EVA/cash calculator, customer risk and value flow analysis) designed to improve working capital management. "In times of crisis, when we are facing a significantly higher risk of insolvency, companies should have a very clear idea of their potential – and use it. Nobody can afford to leave billions of euros idle in their working capital," stresses Roland Berger expert Schwientek in pointing out the need for effective working capital management.

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Working Capital - Cash for Recovery

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