Working Capital Improvements Go Global

After years of lagging behind, European companies finally equal their American counterparts when it comes to average days working capital.

The end of the financial bubble in Europe was evident last year when a squeeze on balance sheets caused a remarkable 83 percent of European industry sectors to report net declines in working capital. “Europe had a lot of fat, and it was easy to get rid of,” says Marc Loneux, REL Consultancy Group’s chief financial analyst.

Although traditionally better at managing working capital, U.S. companies were already well into a downturn, and couldn’t match Europe’s burst of performance. Just 59 percent of U.S. sectors reported reductions in last year’s CFO survey, and average days working capital (DWC) was reduced by less than one-third of the average European reduction.

The 2004 survey once again shows DWC declining in 59 percent of U.S. sectors. This time, however, European performance is on par — 60 percent of sectors reduced DWC. Moreover, the United States and Europe show similar levels of improvement in receivables, inventory, and overall working capital performance. “Clearly, on both sides of the Atlantic there is now a common awareness of working capital best practices,” says Loneux. “It’s part of globalization.”

Ironically, globalization may also account for a slight deterioration in results for Dell, long the leader in working capital management. The company saw days sales outstanding (DSO) rise 20 percent, to 32 days. “As we continue our growth outside the U.S., certain countries aren’t as robust” when it comes to payment and other practices that affect working capital, notes chief accounting officer Robert W. Davis. (For more on working capital, including a browsable version of 67 industry sectors, see “Off the Shelf: The 2004 Working Capital Survey” in the September issue of CFO.)

COMPANY DSO DIO DPO DWC
2003 Change
’03 – ’02
2003 Change
’03 – ’02
2003 Change
’03 – ’02
2003 Change
’03 – ’02
United States
Total 52.1 -2.6% 31.2 -2.5% 29.6 -0.3% 53.7 -3.9%
Total Excluding
Auto Mfring.
41.6 -3.0% 31.5 -3.1% 28.6 -1.7% 44.5 -3.9%
Europe
Total 59.9 -0.5% 35.0 -2.8% 41.8 1.0% 53.1 -3.1%
Total Excluding
Auto Mfring.
51.1 -1.9% 34.1 -3.4% 41.4 0.7% 43.7 -5.8%
DSO: Days sales outstanding
DIO: Days inventory outstanding
DPO: Days payables outstanding
DWC: Days working capital

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