By reviewing the working capital performance of the 4,000 largest companies by sales, including 1,000 companies each in the U.S. and Europe, EY has recently published a research report titled: “Taking stock of working capital” and highlighted the substantial potential offered for those that adopt proper working capital strategy.
Enhanced WC performance by consumer products companies
The EY report demonstrates that 2013 was a year of sharp improvements in WC performance for the consumer products industry. As captured in the chart below, all of the three selected segments within the consumer products industry–food and beverage (FB), household and personal care (HPC) and brewing–showed reductions in their C2C:
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
However, despite the consumer products industry managing a substantial and continuing reduction in its level of C2C since 2007, a closer look reveals major differences in the degree and spread with which different companies in each segment have been able to deliver these increased efficiencies:
The EY report shows that WC performance has improved thanks to the development of sales in fast-growing countries, which now account for half of the total.
$35 billion savings opportunity
The EY report notes that the 20 leading consumer products companies have between $19 billion and $35 billion of cash unnecessarily tied up in working capital processes, which is equivalent to between 3% and 5% of their aggregate sales. The following table captures this vast cash opportunity:
U.S. technology companies deteriorate
The EY report also sheds light on the potential benefit to technology companies through adoption of a suitable working capital strategy. In a report titled: “Cash in the cloud,” EY points out that an analysis of the 70 largest U.S. technology companies by sales in 2013 reveal deterioration in working capital performance as compared to the previous year. For instance, their cash-to-cash increased by 2% during the period, as depicted in the table below:
By analyzing the 70 leading U.S. technology companies, the EY report points out that these companies have between $31 billion and $58 billion in cash unnecessarily tied up in working capital processes, translating to 2.9% and 5.4% of sales:
Striking a pessimistic note, the EY report concludes that the working capital performance for the technology industry as a whole will continue to show little improvement, though the results are likely to display wider divergence among individual companies.