U.S. and European companies are hoarding approximately $1.2 trillion—nearly 7 percent of all aggregated sales—in response to the eurozone crisis and other global uncertainties, according to a new working capital survey by Ernst & Young.
The survey, which looks at the working capital performance of the largest 2,000 companies by sales in the U.S. and Europe, found that that the majority of U.S. companies’ working capital performance improved in 2011, while less than half of the European respondents reported improvements.
“While there are signs of corporate confidence in the global economy, businesses still remain cautious, said Steve Payne, Americas head of Working Capital Management at Ernst & Young. Payne advises companies look into freeing up excess cash to return value to shareholders or fund growth through M&A.
U.S. cash stockpile drops slightly
U.S. companies reduced cash holdings by 3 percent, while Europe remained unchanged from the previous year. American companies improved cash-to-cash performance due to a reduction of receivables and inventories, which were partially offset by lower payables. European companies reduced receivables and payments, while inventories were slightly up.
The 2011 survey was expanded to encompass the largest companies in six additional regions: Asia, Australia and New Zealand, Canada, Central and Eastern Europe, Japan and Latin America. Ernst & Young found Japan to be the worst C2C performer among these areas, with Australia and New Zealand ranking the highest. Working capital performance across these regions varied due to industry bias, differing payment practices, supply chain infrastructures and focus on cash and process efficiency.
The total reduction in C2C achieved since 2002 for both the U.S. and Europe was 16 percent; however, the rate of working capital improvement has been decelerating. “In the past three years, C2C performance has stagnated in both regions, while average annual gains were approaching 3 percent in the previous six years,” the survey noted.
Ernst & Young surmises that this deceleration indicates that companies are reacting to challenging market conditions by increasing their focus on working capital management and making aggressive inventory adjustments. However, Ed Richards, Principal, Working Capital Management at Ernst & Young, suggested that they go even further. “With rising product complexity, high commodity prices and expansion into new geographic markets adding significant stress to the supply chain, companies need to take their working capital performance to a whole new level,” he said. “Many companies only really focus on working capital metrics at key reporting periods such as quarter and year-end and miss out on huge potential cash gains by getting into a monthly or even weekly rhythm.”