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The Importance of Working Capital Management

by Robert Smid, Partner and Head of Working Capital Team, and Niall Cooter, Senior Manager, Working Capital Team, PwC

European companies could release a total of €997bn of cash from working capital if they match upper quartile performance in their sector; €370m for each company

On 15 September 2008, Lehman Brothers filed for chapter 11 bankruptcy protection. This event started an unparalleled global financial crisis that has caused businesses, lenders, insurers and governments to reevaluate their situations, taking steps to protect themselves for now and the years to come.

Since this time, there have been reports of ‘green shoots’. Equally, there have been double dip recessions in many parts of the world and even an unprecedented triple dip recession for some. These factors are directly affecting the availability of debt finance and businesses’ ability to secure it. If they are to survive and grow, they need to be more innovative in their approach to their financing activities. For many, a deep delve into their working capital is likely to be the cheapest and easiest way to release cash. In this uncertain economy, one thing that is clear is that the current turbulent economic conditions are likely to remain for some time and with the limited availability of debt finance, the need to maintain low levels of working capital is becoming ever more important. What was seen by some as an unusual, temporary period of hardship may actually be the ‘new normal’ and is likely to remain so for several years to come.

Over the last few years we have seen ongoing growth in the Far East and other emerging markets. This phenomenon has started to drive a change to a more global supply chain model as more and more products are manufactured in these territories. The result is increased transit and buffer stocks due to the long and variable delivery lead times and shorter payment terms, especially when buying from China. Consequently, there is increased pressure on working capital in the West and working capital is rising fast up the corporate agenda. During this period we have seen some businesses try to ride out the storm, relying on the goodwill of suppliers and lenders, whilst others have taken the opportunity to take decisive action to reduce working capital. But how many of these companies have viewed these actions as a long-term solution?