Raising the funds required to invest in new opportunities is one of the biggest challenges companies face in the post-crisis era. As banking restrictions have made lending less readily available, alternative approaches are called for.
Proactive working capital management enables companies to access the cheapest source of cash to fund growth strategies. PwC studied the performance of 7,000 companies worldwide and found that many organisations could benefit by making improvements in this area. The research estimates that if every company were able to achieve upper quartile performance in terms of managing its working capital, the global cash generation potential would be between €896 billion and €1.4 trillion ($1.1 trillion and $1.8 trillion).
However, the 2014 study showed that global performance has improved by 2% year on year. The greatest improvements were seen in Spain, Portugal, and Benelux (Belgium, Netherlands, and Luxembourg), though organisations in these countries still lag behind the rest of the world in terms of working capital days.
At the company level, 972 of the European organisations studied could release €455 million ($579 million) each from balance sheets if they were to achieve upper quartile performance. In the Americas, 2,075 companies could release €294 million ($374 million) each. Among the firms studied in Asia, Africa, and Australia, 2,457 could free up €148 million ($188 million) each in the same way.
The study shows that working capital performance is a broad indicator of corporate management. The top performers were able to improve working capital, achieve a higher EBITDA, invest greater sums in the business – and need to borrow less to do so.
In a PwC blog post, the authors of the study outline four steps to unlocking working capital:
- Identify, harmonise, and improve commercial terms for suppliers and customers.
- Optimise processes throughout the working capital cycles.
- Implement process compliance and monitoring.
- Create and embed a cash culture, optimising the trade-offs between cash, cost, and service.
To bring about sustainable change, the authors of the research recommend that the project include the following additional steps:
- Quantifying the opportunity for improvement by benchmarking performance against peers and assessing existing policies and processes against best practice through a diagnostic review of working capital cycles.
- Developing a detailed action plan for implementation.
- Deploying technical experts to implement best practice processes and policies and drive performance improvement.
—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.