Financial Times FT.COM

June 24, 2012

Poor cash handling takes €800bn toll on European groups

By Alison Smith, Chief Corporate Correspondent

Europe's largest companies wasted almost €800bn last year as a result of inefficient cash management, research suggests.

A study of the 1,000 biggest listed European groups by sales suggests that they relaxed their efforts to improve their internal cash position as soon as they saw an uptick in sales.

REL, the working capital consultancy that carried out the research, says that the best-performing European companies have only about half as much working capital tied up in their operations as those with median performance.

The gap between the upper quartile performance and the median was most marked when it came to stock levels: the best performers had only 12.7 days worth of inventory on-hand, compared with 38.6 days for the median.

Gavin Swindell, managing director of REL, says: "Businesses are not set up to manage cash, but to manage profit. Because the focus is on revenues and costs, cash is not as well-managed - and can tend to get lost in the mix."

He says that at the beginning of the financial crisis, though companies were keen to chase customers and took longer to pay suppliers, their working capital position still suffered because they were caught with stock that was not selling as well as they had expected. During the following couple of years, the inventory position improved, and so companies benefited from more-efficient working capital performance.

But, he says, that better performance is now at risk of being lost, with only a small improvement in 2011 against 2010.

While the 1,000 companies collectively are managing their cash better than they were doing before the financial crunch, the gap between the strongest performers and the rest is widening.

The study shows that only 99 companies - less than 10 per cent of those covered in the survey - were able to sustain an improvement in working capital over three years. During a five-year period, only one per cent of companies maintained or improved their cash management.

Even among those companies, none managed to improve all three elements of working capital performance - taking longer to pay suppliers; getting paid more quickly by customers; and not having too much cash tied up in stock - each year.

The sector with the greatest percentage improvement in working capital performance was telecomms. REL said the gains came mainly as a result of better management of supplier and customer payments. The worst performance came from the airlines sector, still experiencing the impact of the global downturn, as were the hotel, restaurant and leisure industry and specialist retailers.

The REL research excludes oil and gas groups on the basis that their performance is both very volatile and dependent on the oil price.

Copyright 2012 The Financial Times Ltd. All rights reserved.

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