Wednesday, December 16, 2009
Reducing working capital: statistics since the credit crunch

PWC just published its latest European Working Capital study and found that its sample of almost 1000 European firms in ten varied industries showed virtually no improvement in working capital as a % of net assets, since the end of the last recession in 2004.  The researchers theorize that low interest rates and easy credit made it unnecessary for management to worry about cash in 2004 through 2008, the way they’ve had to focus on it since credit contracted in the fall of 2008.

Key statistics: Days’ sales outstanding (DSO), the average number of days between invoicing and collection, fell by nine days, from 86 days in 2005 to 77 days in 2008.  At the same time, days’ payables outstanding (DPO), the average number of days between receiving trade creditors’ invoices and paying them, fell by four days, from 52 days in 2005 to 48 days in 2008.  These figures show that firms focused more on collecting from their customers than they have on negotiating extended terms with their vendors. The research also found that an increased use of securitization, such as factoring, also influenced the drop in DSO.

The researchers point out that increasing collections and stretching payables can only go so far in reducing working capital.  After all, when everyone is tightening credit standards and stepping up collection efforts, there is little opportunity for anyone to stretch payables on the back side of the equation.  The key finding is that maximizing supply chain and distribution efficiency may be the last remaining option for many companies to significantly reduce working capital.  The authors warn that optimizing a key process like the supply chain, requires changing a firm’s underlying structure. Unlike the results that come from putting extra manpower on collections, this will not be a quick and easy win.  Improvements of ths magnitude come about through company-wide change efforts that focus on employee learning and engagement, accurate performance measurements and effective use of information technology.

The research study can be read in full by Damien McMahon and Didier Vandenhaute can be read by clicking here.