Working capital is a large component of corporate liquidity, accounting for close to 15% of sales and 20% of capital employed at Europe's top 1000 companies, according to a 2003 report by REL Consultancy, the financial advisors. Though net working capital for European companies is falling, says the report, there is still ?580 billion of cash tied up in business operations. Working capital is made up of operating cash, trade receivables and inventories ? it is the capital in these areas that CFOs are hoping to capture.
US corporates have been recognised as the first to exploit working capital management yet in terms of recent performance it is Europe (an average of 53.3 days working capital ? DWC - in 2003) that has been catching up with the U.S.(53.7 DWC). Europe registered a combined 9.7% DWC improvement in the last two years compared with a 5.0% improvement for the US.
Two reasons for the improvement in working capital, according to the report, are a significant drop in inventories (Days Inventory Outstanding down 2.6% in 2002 and 3.4% in 2003) as well as a drop in receivables (Days Sales Outstanding down 0.4% in 2002 and 1.9%