When it comes to working capital management, 2007 was not a vintage year. For Europe’s largest companies, days working capital (DWC) rose to 47.3 last year (excluding carmakers), an increase of 1% since the 2006 scorecard, according to REL, a research and consulting firm.
Taking a longer-term view, companies have improved working capital management, but not by much. Over the past four years, on average, DWC has fallen only 0.3% a year. Cancelling out an improvement of payables over this period has been receivables, largely flat over the past four years, and inventory, which rose in three out of the past four years.
Gavin Swindell, REL’s European managing director, suggests that the 2007 spike in inventory could be a sign of a slowdown in many economies. Should the economic malaise worsen, the long lead times and buffer stock companies hold as a result of sourcing and producing more goods in China, India and the like may batter balance sheets even more. Meanwhile, the soaring price of transport is eroding the cost savings that first motivated these moves eastwards. “What companies saved in capital and labour costs, they’re now paying for in inventory,” Swindell notes.
Unless CFOs keep a careful eye on working capital, the modest deterioration in 2007 may look good compared with something far more alarming in 2008.