Hackett: €1.3 Trillion in Untapped Working Capital Opportunity for European Companies

Gen AI emerging as key technology to diligently manage working capital performance

Hackett: €1.3 Trillion in Untapped Working Capital Opportunity for European Companies

The Hackett Group, Inc. (NASDAQ: HCKT) reports that European companies have encountered critical challenges in managing their working capital in 2024. The latest European Working Capital Survey reveals a €1.3 trillion opportunity in untapped working capital, accentuating the urgency for companies to optimize their working capital management amid ongoing economic uncertainties.

The European Union’s economy demonstrated resilience initially, but ongoing geopolitical tensions and soaring consumer prices led to a substantial slowdown in the latter half of 2023. Data from Europe’s leading companies show mixed changes in key working capital metrics. Days inventory outstanding (DIO) worsened by 5%, reaching 66 days, while days sales outstanding saw a modest improvement of 0.2%, reaching 47 days. Days payables outstanding increased by 2%, reaching 70 days. This combination led to a deterioration in the cash conversion cycle by 4% – now standing at 44 days.

Industries reliant on energy from fossil fuels faced significant challenges and reverted to strategic buying to secure energy supplies and mitigate cost increases amid geopolitical turmoil. This preemptive inventory buildup led to a notable increase in DIO for these sectors.

“This trend presents a considerable concern for European businesses since macroeconomic uncertainties and inflationary pressures are expected to continue, adding external strain to working capital management,” said Istvan Bodo, director of Strategy and Operations at The Hackett Group. “Persistent high interest rates have significantly increased the cost of holding money trapped in working capital compared to previous years.”

Equally troubling is the decline in operational and liquidity metrics. The report highlights a decrease in the average cash to current liability ratio from 0.31 to 0.28, along with an increase in total debt as a percentage of revenue from 40% to 43% and an increase in cash on hand by 3%, reaching 12% of revenue. These dynamics illustrate the complex interaction between efforts to manage inflation and the economic slowdown due to high interest rates.

The survey also records a widening performance gap between top performers and median companies. Upper-quartile companies are now converting cash more than five times faster than median performers, emphasizing the necessity for businesses to manage their financial resources prudently to remain competitive.

The survey identified €1.3 trillion in untapped working capital opportunity. It includes €460 billion tied up in accounts payable, €456 billion in accounts receivable and €411 billion in inventory. These figures represent the potential liquidity that could be unlocked if median-performing companies improved their working capital management to match the efficiency of top-quartile companies.

“This widening performance gap accentuates the need for European businesses to manage their working capital diligently,” added Bodo. “Leading companies will harness advanced technologies like Gen AI to forecast cash flow with greater accuracy, optimize inventory levels in line with fluctuating customer demand and enhance just-in-time sourcing strategies.”

In the face of persistent geopolitical uncertainty, moderate return to economic growth and high interest rates, the need for effective working capital management is more critical than ever. With the transformation generative artificial intelligence (Gen AI) will have on business operations, organizations must target and prioritize Gen AI capabilities to optimize the cash collection and accounts payable cycles, and better anticipate customer demand and inventory needs.

Gen AI will provide new enablement opportunities to enhance working capital management across the board. Leading businesses will use Gen AI to improve cash flow forecasting accuracy, predict optimal inventories that meet ever-changing customer demand, develop more robust just-in-time sourcing demand planning and more. Determining an organization’s AI opportunities and readiness is the first step to unlock and properly deploy the tremendous potential of Gen AI.

About The Hackett Group

The Hackett Group, Inc. (NASDAQ: HCKT) is an IP and platform-based, Gen AI strategic consulting and executive advisory firm that enables Digital World Class® performance. Using AI XPLR™ and ZBrain™ – our ideation through implementation platforms – our experienced professionals help organizations realize the power of Gen AI and achieve quantifiable, breakthrough results, allowing us to be key architects of their Gen AI journey.

Our expertise is grounded in unparalleled best practices insights from benchmarking the world’s leading businesses – including 97% of the Dow Jones Industrials, 89% of the Fortune 100, 70% of the DAX 40 and 55% of the FTSE 100.

For more information on The Hackett Group, visit: https://www.thehackettgroup.com/ or email media@thehackettgroup.com.

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