Europe’s top firms start to spend cash pile, REL research shows

Europe’s companies, which have been sitting on a cash pile equivalent to some 9.4% of the region’s gross domestic product, are beginning to spend, according to research from the working capital consultancy REL.

Analysis of the performance of 1,000 of Europe’s largest listed companies by sales in key areas, shows that while these companies improved performance marginally in 2011, they still have about €886bn in excess working capital.

The firms are now turning away from the strategy of hoarding cash – a practice that emerged at the start of the 2008/2009 recession – and are increasing investment in anticipation of growth and reducing cash on hand.

At the same time they are continuing to take advantage of low-cost loans, resulting in rising debt levels.

“With capital expenditure increasing we’re reaching a real danger point,” warns Gavin Swindell, managing director of REL UK. “Due to low interest rates we’re going back to financing working capital which means taking on more debt, more leverage and the whole cycle repeats itself.”

Overall, working capital performance has improved less than 2% since 2010, with the majority of the improvement coming from faster collections. Total debt increased by €95bn year-on-year, and cash on hand decreased by €60bn, after hitting record highs in 2010.

Swindell said despite the uptick in working capital performance, there was no indication companies could generate sustainable improvement in key areas like receivables, payables, and inventory. The research indicated 69% have not been able to maintain their working capital performance over a three-year period, without deteriorating by more than 5%.

The top performers operate with more than half the working capital of typical companies, collecting from customers nearly 16 days faster, paying suppliers nearly 17 days slower, and holding nearly 70% less inventory. But even among these top companies, none have managed to improve all three elements over three years.

The research found this may be because they have focused less on improving their internal cash position as sales increased. Compared to 2007/8, companies boosted their revenues by 10.7%, while net working capital increased by 8.8%.

Companies are also re-investing in anticipation of growth: capital expenditure increased by 7% and is now above what it was pre-recession. “Companies will have to generate the cash internally to sustain the levels of investment they have started,” says Swindell.

He added: “It is fine to take on cheap debt, provided they have confidence in their revenue streams and the ability to pay it off. If companies’ revenue streams do not materialise, and their debt positions have increased, they will be in the same position that they were pre-crisis.”

REL, a division of The Hackett Group, has delivered projects to improve firms’ working capital in over 60 countries for Fortune 500 and global Fortune 500 companies.


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