Businesses are sitting on a potential €3.7 trillion of free cash
An analysis by PwC shows that working capital levels have increased by almost 2 percent globally year on year and that if companies took action to handle their working capital more effectively, they could release some €3.7 trillion in cash from their businesses. This would equate to an average of 11% of turnover by company.
Stanley Subramoney, Strategy Leader of PwC South Africa, says: “While American and Asian companies saw their working capital increase, African and European countries have shown an improving trend. This highlights the correlation between Gross Domestic Product (GDP) and working capital; countries experiencing the highest increases in GDP have also seen the greatest increases in working capital.”
The PwC working capital survey, which analyses the accounts of 15, 763 publicly listed companies across the world, also found that 13 out of 21 country clusters have actually shown a reduction in working capital levels.
“While the pursuit of growth remains vital for companies, working capital and cash flow management has become a primary focus. This reflects the difficult economic environment which has put companies under pressure to manage their liquidly as effectively as possible,” says Subramoney.
Some companies tried to ride out the storm, relying on the goodwill of suppliers and lenders, while others have taken the opportunity to take decisive action to reduce working capital. If companies take action to reduce their working capital more effectively, a staggering €3.7 trillion of cash from working capital could be released globally, suggests the survey report. For African, Asian and Australasian companies this equates to €1,511 billion in total and €170 million on average.
“Company directors tell us that, while the pursuit of growth remains vital for companies, the most marked increase in focus over the last year has been in relation to working capital and cash flow management. This reflects the difficult economic environment putting companies under pressure to manage their liquidity as effectively as possible.”
The survey also found that globally the highest levels of working capital are seen in pharmaceuticals and manufacturing, driven by both high levels of inventory and debtors. At the other end of the scale, retail, telecoms and oil and gas show the lowest levels of working capital.
Subramoney concludes: “With the availability of debt funding still tight and banks under continual pressure to protect their assets, it is likely that funding will continue to be difficult to obtain for the foreseeable future. This highlights the need for working capital management to be higher up on the agenda so that companies can tap the cheapest source of cash: working capital.”