Working Capital – Is your company's cash "all tied up"?

Given the backdrop of the current recession, it would appear that many companies, despite a renewed focus on working capital management, may still have much of their liquidity restrictively tied up in these balances.

Up to US$1 trillion in fact, across leading corporations in the US and Europe, according to a new report by Ernst & Young.

Garen Walkerley, Director of Ernst & Young Transaction Advisory Services says: "The trends identified across the globe are likely to be similar in South Africa. Working Capital and its potential impact on cash flow has long been ignored by many companies, largely because the fundamentals are not always clearly understood and, as such, strong management practices not implemented to take advantage of the additional liquidity that may be unnecessarily locked away.

“During a credit crunch, the management of cash is a key determinant of success. Every company falls somewhere on a stress pendulum between cash earn and cash burn," commented Walkerley.

All tied up, a report on the working capital performance of the 2,000 largest companies by sales, headquartered in the US and Europe, finds that the proportion of companies reporting improved working capital performance fell to only 43% for each region when the last quarter of 2008 and 2007 were used as a basis for comparison (by contrast, 63% of the companies in the US and 50% of those in Europe reported lower levels of working capital in 2008 compared with 2007).

For the full year 2008 compared with 2007, the cash-to-cash (C2C) cycle improved by as much as 7% in the US and 6% in Europe. However, using the last quarter of the year as a basis shows a radically different picture, with a year-on-year deterioration of 7% in the US (and 3% in Europe for the companies reporting quarterly sales).

"The deterioration in the C2C cycle during the last quarter of 2008 reflects both the impact of the economic downturn, together with heightened volatility in currency and commodity prices around the world. This change in economic circumstances demands that companies turn their focus to working capital management as part of their strategy to improve cash flows," says Walkerley.