The Working Capital after the Global Financial Crisis and Economic Recession Essay

The PwC European Working Capital Study on Cash release from the supply chain remains the biggest challenge to understand how the global financial crisis and subsequent economic recession have affected the liquidity of the corporate and the way they manage working capital. 

Methodology Over 1,200 listed companies were selected for the study from 12 European countries and the top 200 companies from each country based on their market capitalisation were identified, and were grouped in 10 different industry categories namely consumer goods, manufacturing , services, pharma, utilities, telecom, technology, basic materials, retail and oil and gas. The study presents an indication of the current market trends in the analysed sectors and countries, and the performance was benchmarked with the peers.

Key findings The key findings are as follows 1. More than 475bn was unnecessarily tied up in working capital in the European companies covered in the study. 2. Working capital ratios have deteriorated for the first time since 2005. 3. From 2008 to 2009 all three working capital areas(debtors, creditors and inventory) have deteriorated 4. Supply chain management continues to be the biggest challenge. 

The working capital ratio (net working capital divided by annual sales) indicates the flexibility of the supply chain of the company in question, and efficiency of the underlying processes. In other words, where the turnover decreases, is the organisation also able to adapt its level of working capital? The improvements made in the heat of the crisis just temporary or rather patchwork solutions do not sustain. The crisis had large impact on liquidity of large, listed companies. Structural changes to underlying core processes were not initiated. Because more attention was devoted to cash perhaps due to the recent regulatory changes, Spanish companies improved their working capital ratio by 1.3% and Belgian companies by 1.1%, and French firms by 0.8%. 

Poor Cash Conversion Cycle (CCC) Cash conversion cycle measures the efficiency of managing working capital. In 2009, the average European cash conversion cycle (CCC) was 76 days and this reflected deteriorations in respect of not only debtors. This reflects that the awareness in terms of utilising the factoring services was fairly low and substantial improvements could be made by better managing the forecasttofulfil cycle, providing much needed flexibility. That would enable better, quicker reaction to fluctuations in demand. Certain quick wins mainly in receivables the companies could realize did not sustain for long as they did not optimise their own supply chains and distribution models. This problem would not have been so severe had the companies in the survey taken up the supply chain financing extensively. Very few companies took the opportunity to consider using the more alternative financing solutions to better manage their payables, such as supply chain financing to further extend payment terms, without necessarily damaging the supplier relationships.

Some insights About the activities treasurers have implemented to reduce working capital usage, PwC 2010 Global Treasury Survey revealed the following insights and the there was an overall effect on on reducing net working capital.