Annual Working Capital Survey - UK 2011
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Annual Working Capital SurveyKPMG cash and working capital management survey report 2011
In 2011 KPMG in the UK commissioned MD Media to conduct research into cash and working capital management. The survey comprised interviews with 300 finance executives in the United States, Canada and continental Europe.
About the authorsAndrew Ashby Associate Partner KPMG in the UK Roger Bayly Associate Partner KPMG in the UK
Andrew has more than 12 years of professional services experience in the areas of sales, marketing, SG&A cost reduction and cash and working capital management. He graduated in Economics and Corporate Finance from Brunel University and started his career as an equity analyst with Kleinwort Benson. Andrew joined KPMG to lead the corporate cash and working capital practice. He specializes in helping companies improve cash flow from operations. Prior to KPMG he was the US and then European President of a specialist consulting company focusing on cash and working capital management. Andrew works with companies to help them identify opportunities for improving their visibility and control of cash flow around the business and supporting them with programs to release cash locked up in working capital, tax, capex and other assets. Andrew has been involved in over 40 working capital programs either as the project leader or advisor. Many projects have been global requiring effective program management and co-ordination of multiple teams in different regions. The majority of projects have been focused on the implementation of sustainable improvements in working capital, achieved by driving behavioral change across businesses.
Roger joined KPMG in 1998. He specializes in operational restructuring and turnaround of businesses in the consumer and industrial markets sector. Roger works with management teams to create and execute operational restructuring programs. He has worked with numerous companies, from multi-billion dollar global businesses to 50 million single site operations. Roger has led projects aimed at all areas of the Profit and Loss and cash flow including new product development; supply chain reorganization; site consolidations and outsourcing; rationalization of back office functions, property moves and operational improvement initiatives. Recently, Roger has led a major operational restructuring for a FTSE 100 scale industrials business aimed at taking out 15 percent of the cost base and improving cash performance. Roger started his career as an engineering apprentice with Jaguar Cars. He graduated in Engineering at Cambridge University and worked on a range of Jaguar and Ford programs.
Our contributersMichael Keppel Chief Restructuring Officer Phoenix Pharmahandel John Mullins Professor of management practice and entrepreneurship London Business School Jeff Van Der Eems CFO and Coo United Biscuits Francios Masquelier Head of Corporate Finance RTL Steve Lucas Finance Director National Grid Ken Daly Global Financial Controller National Grid Sten Daugaard CFO Lego
ContentsSection 1: Executive summary Section 2: Lack of incentives Section 3: Slipping down the agenda Section 4: Struggling with implementation Section 5: The road ahead Section 6: Challenging assumptions 1 8 10 12 13 14
1 | Annual Working Capital Survey
Executive summaryCash and working capital management remain a high priority for leading businesses but there are worrying signs that improvements in performance achieved during the downturn may be eroded as a result of failure to institute effective core management as part of business as usual.
in emerging markets is also affecting commodity prices, forcing raw materials costs higher as demand risesPast experience tells us the priority given to cash and working capital management tends to have an inverse relationship with economic performance. In periods of contraction or sluggish growth, cash and working capital issues rise to the top of the boardroom agenda. When prosperity returns, the focus shifts elsewhere. But the past is not necessarily an accurate predictor of the future. The recent downturn was triggered by the global financial crisis and throughout the recession, constrained access to capital was one of the major factors forcing companies to assess the cashgenerating ability of their operations. And today even though the recovery is now underway - the cheap finance that fuelled the preceding boom is nothing more than a rapidly fading memory. Given this new reality, you might assume a sustained shift in corporate behavior, with effective cash and working capital management remaining a key priority for businesses an integral part of the corporate five a day - even when demand and revenues begin to gather pace. However, the results of our survey this year, suggest that even in the current era of relatively expensive finance and patchy growth, a sustained commitment to cash management, both in bad times and good, is not yet embedded.
At first glance, the findings of the survey are moderately encouraging. Cash management remains high on the agenda, with 83% of respondents naming it a top five priority, However, that does represent a slight reduction from the 86% figure returned in last years poll. Perhaps more significantly, the percentage of respondents assigning highest priority to working capital management fell from 84 to 75. Both findings suggest that the onset of recovery has triggered a shift in focus, with cash and working capital management moving, albeit slowly , away from the centre corporate radar screen. The danger is that this trend will ultimately result in the improvements achieved during the downturn being eroded just at the time when corporate demands on financial resources are on the increase. Recoveries see more cash consumed, cash grow requirements faster than sales. All of this begs some critical questions. Should cash and working capital management by prioritized in good times and bad? And if thats the case, why does it seem such a struggle to sustain a commitment to running a tight ship when the economic cycle turns up? These questions were very much to the fore when KPMG embarked on its third annual survey of cash and working capital management.
radar, with nearly all respondents rating it as a high priority. But the survey also reveals significant challenges. Finance executives are struggling to improve working capital performance, for a variety of reasons, including corporate complacency and lack of clarity from leadership at the top. This is worrying. According to most forecasts, the economies in key developed countries will recover, but not to the robust growth levels of previous times and even large companies cant expect the double-digit top-line expansion that they once enjoyed. This is no time for boards to take their eyes off the working capital ball.
Taking the InitiativeAnd nor do they have to. Our survey contains interviews with three finance executives who have successfully implemented working capital management initiatives while also demonstrating that some of the perceived obstacles can be overcome. For instance, its often said that managers in highly regulated industries are too hidebound by the rules and statutes surrounding their businesses to make effective changes in the long term. However, at energy company National Grid, measures to improve the visibility of working capital management have played an important role in helping the company to expand. Rather than tying the companys hands, regulation acted as a spur to coming up with imaginative revenue collection strategies in a market where simply cutting customers off is not an option. Lego has demonstrated that there neednt be a dichotomy between driving sales and a commitment to working capital management. By focusing on the
Challenges and OpportunitiesFocusing a companys attention on cash, while putting the squeeze on working capital is always a challenge. But it is even harder during the good times when, inevitably, resources are thrown into expanding the top line, leaving little energy or focus for addressing process inefficiencies that needlessly tie up cash. Cash management is clearly on finances
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customer through high quality, safe and attractive products, the company has sustained a community of happy retailers who, crucially, pay their bills on time. Meanwhile, our interview with the CFO at United Biscuits demonstrates that not only can working capital management projects be sustained over a protracted period, they are at their most effective when not tied to a limited time frame. As the firms CFO says: the focus on working capital never ends. And it shouldnt.
The following are the highlights of the findings of our cash and working capital survey:
Key data Cash continues to be a top priority for companies: 83% of respondents say its among their firms top five priorities. While thats down slightly from 2009s 86%, theres been a big increase in the number of CFOs citing it as their number one strategic priority -- 38% in this year compared with 28% previously. Finances ongoing focus and increased prioritization has helped drive a noteworthy improvement in the accuracy of cash flow forecasting, continuing the upward trend of the previous two years -- 48% of respondents say their companies hit their targets in 2010, compared with 28% in 2009 and 14% in 2008. But in the case of working capital management at a company-wide level, we have seen a retrenchment over the past 12 months. In 2009, 84% of respondents placed working capital management as a high or highest priority. This has fallen to 75% in the most recent survey, reinforcing the view that companies have started to shift their focus now that the signs of a recovery have become clearer