European companies improved their working capital performance in 2015 compared with the previous year but still have an “improvement opportunity” worth some €981bn, according to an annual survey by consultancy REL, part of The Hackett Group.

That opportunity is defined as the amount of working capital that could be turned into cash if every company was performing at least as well as the upper quartile for its industry.

For the 960 companies REL studied, the cash conversion cycle has improved year-on-year by 1.7% from 38.9 days to 38.2. This is down from a recent peak of 41.6 days in 2011.

European companies have a €349bn opportunity facing them lies within payables, a further €305bn in receivables and €328bn in inventories. Last year saw:


  • an improvement in receivables (DSO down from 47.5days to 46.2);
  • an improvement in payables (DPO:COGS up from 64.7 days to 65.4); but
  • a worsening in inventories (DIO:COGS up from 56.1 days to 57.4)

Gerhard Urbasch, a senior director at REL, says that the companies that tend to do better at working capital management are those with more centralised processes and more integrated IT solutions. “Where you have fewer local fiefdoms, they do better,” he says.

“Also, companies that have a higher volume of transactions [perform better] because they don’t need to reinvent the wheel for each project.” Pharmaceuticals tend to perform worse than the profit-squeezed auto industry, which Urbasch says is “because of the big margins [in pharma]: the supply chain and working capital have not traditionally been such critical success factors as R&D”.

Notable year-on-year improvements were seen in the marine shipping, internet software and services, and electrical products sectors, while the semiconductors and equipment sector and wireless telecommunications saw notable deteriorations in their CCC performance.

“Ferrari in the garage”

The lack of improvement in inventories is “shocking”, Urbasch says, especially given that companies spend a lot of money on IT systems. “They have a Ferrari in the garage but they drive it in first gear. Issues such as master data management are not being done handled properly, the right processes and interfaces are not set up.” He adds that parameters such as replenishment lead times and service levels need to be properly established.

The research suggests that working capital improvements can be particularly hard to sustain. Over the last five surveys, only between 11% and 14% of companies have managed to generate year-on-year improvements in CCC for three years successive or more.

Urbasch explains that this is because companies will often have a sudden short-term focus on working capital: “They put pressure on suppliers and customers but then they hit the ceiling, rather than really cleaning up their processes. You need to develop the blueprints.”

Cash and supply chain finance

Cash on hand at European companies has increased from €347bn in 2008 to €833bn in 2015. However, REL says that 20% of those cash holdings – €164bn – are held by just nine companies. Over the same period, companies have taken the opportunity of cheap finance rates to increase debt from €2,263bn to €3,125bn. At the same time, capital expenditure has increased from €477bn in 2008 to €519bn, while dividend payouts have also increased, from €185bn to €231bn.

“Traditionally, management has been focused on costs, not cash,” says Urbach. But while it’s not possible to unpick from the REL data the extent to which companies are adopting supply chain finance, he says: “There is a rising interest in supply chain finance when talking to different customers. That is definitely a trend that I see.”

Why CCC?

For the second year, REL has calculated the cash conversion cycle (CCC) rather than the more commonly used metric of days’ working capital (DWC) as the primary measure of working capital performance. The CCC compares working capital with the cost of goods sold rather than with revenue. REL says in its research that this gives “a more accurate approach to measure inventory and payables performance”. The metric reveals the time in days that cash is tied up in the business as it is “a measure of the amount of time each net input euro is tied up in the production and sales process before it is converted into cash through sales to customers”.