Top European and US suppliers are sitting on up to US$16.6bn excess working capital because of late payment of invoices by customers, suppliers being paid too early and inventory lying unsold on warehouse shelves, according to research from corporate financial consultants, Hackett-REL.
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The top 20 US suppliers have $7.6bn unnecessarily tied up in working capital, and the top 17 European suppliers have around $9bn.
According to the research, on average, US auto suppliers significantly outperform their European counterparts, showing 37% lower net working capital ratios. But some of this gap, and the strong working capital performance by several US auto suppliers that are already in or near bankruptcy, is likely to have been driven by special assistance programmes from US automakers, and may disappear in 2006.
In addition, Hackett-REL estimates that auto suppliers could see significant bottom-line benefits from reductions in administrative and operating expenses associated with working capital optimisation. US auto suppliers could reduce operating costs by over $700m, while European auto suppliers could see gains of up to $480m. These improvements could have a direct impact on improving earnings before interest and tax (EBIT).
“The cash-strapped US auto suppliers are missing an exceptional opportunity here, leaving billions of cash on the table,” noted Hackett-REL global practice leader Stephen Payne. “Even as some of the industry’s largest companies reorganise under bankruptcy rules and fight pitched battles over employee wages and pensions, they are overlooking money that is literally right there trapped on their balance sheets which could have a significant impact on their overall liquidity. It’s tough to understand how companies could ignore this, since in some cases it could keep them from shutting their doors permanently.”
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By GlobalDataAccording to Hackett-REL senior analyst Marc Loneux, “Working capital that is ‘liberated’ from balance sheets through such tested working capital methods as improved collection, better logistics, supply chain optimisation and more efficient buying will always be the cheapest source of capital for corporations. This is a particularly important opportunity in light of a challenging business environment, which is being exacerbated by rising interest rates.”
