Treasury Today Country Profiles in association with Citi

The drive to improve working capital

Lorry driving on the motorway

Working capital management has risen up the agenda of large companies during the last year but they are still struggling to convert sales into cash, according to research by working capital consultancy REL. This insight includes a case study by Atlas Copco presented at the EuroFinance Singapore conference in May.

Europe’s largest listed companies are sitting on €762 billion in excess working capital, according to research from working capital consultancy REL, a division of The Hackett Group, Inc. A similar story is playing out in the US, where the opportunity for working capital improvement at 1000 of the largest public companies rose dramatically, topping $1 trillion for the first time. What are corporates in Asia doing?


Despite European corporate revenue increasing by 6% year-on-year (and 35% over a three-year period), there were clear signs of difficulty in converting these sales into actual cash, as cash conversion efficiency (operating cash flow/revenue) deteriorated three years in a row from 13.4% in 2009 to 10.6% in 2012. Profitability by EBIT Margin (EBIT/revenue) also decreased by 9% year-on-year.

The survey reveals a total of €762 billion is tied up in excess working capital – equivalent to 6% of EU GDP in 2012. The biggest opportunity for companies lies in improving receivables, which represents approximately 36% of the total working capital opportunity. REL estimates that €272m is available within accounts receivables (AR), €257m in inventory and €232m in accounts payable (AP).

In addition, free cash flow (FCF) – an important indicator of the health of corporate cash flows – reduced by 18%. Cash on hand continued to increase – $57 billion year-on-year, or 9% increase, and debt increased by $147 billion (6% increase year-on-year) – indicating that companies continue to take advantage of the low interest rates to improve their cash positions. The borrowed cash however is apparently being put into use, with capex increasing by 9% year-on-year and 18% over a three-year period. Annual dividends paid out increased by 5% year-on-year and 29% over a three-year period.

According to REL research, there is a widening gap between the top performers in the study (companies in the upper quartile of their industry) and typical companies, with the leaders operating with less than half the working capital, collecting from customers more than two weeks sooner and paying suppliers two weeks later on average, while holding less than half the inventory.

However, sustainability of working capital improvements remains a major issue across the board. Only 12% of companies improved days working capital (DWC) performance for three consecutive years. Even allowing for flat performance or slight deterioration (5%) extends this group to just 27%.


REL’s research found that as US corporate revenue grew by 5% in 2012, profitability – as measured by EBIT margin – decreased. At the same time, working capital levels increased by 6%, to levels 25% higher than three years ago. Actual DWC remained flat. But cash conversion efficiency deteriorated for the second year in a row, indicating that companies are taking longer to convert sales into cash. In addition, FCF fell by 14% year-on-year, indicating poor cash flow management.

The working capital opportunity at the companies in the study reached nearly $1.1 trillion in 2012, an amount equal to 7% of the US GDP. Nearly half of the working capital management gap represents excess inventory being held by typical companies. Overall, top performers now operate with about half the working capital of typical companies. They collect from customers more than two weeks faster, pay suppliers over 10 days slower and hold less than half the inventory. The research also found that few companies are able to sustain working capital improvements, with less than 10% of all companies in the study improving working capital performance for three years running.

Companies continued to borrow to grow their cash hoard in 2012, the study found, with debt rising by 10%, or over $350 billion. At the same time, companies reinvested heavily, with capex hitting a new all-time high, having risen by 50% over the past three years. Companies are also clearly spending in other key areas, including increased dividends, share repurchases, pension contributions, and global expansion.

“The overall ability of companies to manage working capital is clearly continuing to worsen,” said Dan Ginsberg, an Associate Principal at REL Consulting. “Companies know how to do better, because they did so during the heart of the recession in 2008, making dramatic improvements in just a single year. But very quickly their focus turned back to growth, and working capital rebounded.”


At the recent EuroFinance conference in Singapore, Audrey Deng, Head of Group Treasury, Asia Pacific at Atlas Copco, outlined the company’s decision to implement a $75m supply chain finance (SCF) programme in Asia, in order to support both its suppliers and its working capital objectives.

Atlas Copco, an industrial group headquartered in Sweden with a revenue of €10.5 billion, is keenly focused on maintaining the momentum to improve working capital management and has been seeking ways to further streamline the supply chain. The company had been running SCF programmes in Europe and the US for many years but very little in Asia. But as Asia has become increasing important, explained Deng, the company decided to implement a SCF programme in the region.

Its objectives were to:

  • Harmonise payment terms.

  • Enhance working capital management.

  • Help key suppliers meet their liquidity requirements.

  • Strengthen Atlas Copco’s supplier base.

Its main challenge was that market conditions have made it difficult for some suppliers, especially those less well-capitalised, to support Atlas Copco. So it embarked on an SCF programme in January 2011 with a feasibility study and the group made the strategic decision to go ahead in June 2011. In February 2012, it issued a request for proposal (RFP) and selected its SCF provider, J.P. Morgan (JPM), in April 2012. In August it kicked off its SCF programme with an IT review and documentation. The programme includes treasury, procurement and JPM teams.

SCF implementation included:

  • Enrolment strategy.

  • Data analysis.

  • Communications strategy.

  • Buyer training,

  • Supplier enrolment.

  • Supplier execution.

Based on the information provided by Atlas Copco, a phased approach was established, which included:

  • Selected suppliers were targeted to offer a SCF programme.

  • Programme scope covered over 54% of total Atlas Copco annual spend.

  • Suppliers were further grouped into three waves based on geographic and supplier specific prioritisation.

  • Each wave consisted of three tiers based on supplier profile.

Key considerations for supplier prioritisation include, but not limited to:

  • Interest rate differential opportunity.

  • Supplier-buyer relationship (strategic/non-strategic supplier).

  • Type of spend (direct/indirect).

  • Annual spend volume.

  • Payment terms and potential to extend the payment terms.

  • Geographic prioritisation.

The supplier onboarding plan is to be further analysed and updated throughout the actual implementation cycle in order to maximise the effectiveness of the SCF roll-out.

Atlas Copco went live with its SCF programme in November 2012. It was rolled out to 17 buying entities in China and Japan, with India currently under implementation. In China, suppliers across the country have signed up for this programme and the number is continually growing. The programme covers both domestic and overseas supplier entities. The programme supports local currency in the three markets, as well as US dollar in Japan.