EU companies have 1.3 trillion euros of working capital lying idle

January 15, 2025

Georg Bach, MD Central Europe at The Hackett Group®, on the negative development of working capital performance in Europe and the opportunities that Gen AI opens up to optimize working capital.

The strategy consultancy The Hackett Group® presents alarming figures in its recently published study “EU 1000 Results”: In the 2023 financial year, a total of 1.3 trillion euros in working capital potential remained unused in the approximately 1,000 companies examined.

Changes in key working capital ratios

The European Union economy initially proved resilient, but ongoing geopolitical tensions and rising consumer prices led to a significant slowdown in the second half of 2023. Data from leading European companies show mixed changes in key working capital metrics: Days Inventory Outstanding deteriorated by 5%, reaching 66 days and tying up €411 billion in capital, while Days Sales Outstanding improved slightly by 0.2% to 47 days and totaling €456 billion. Days Payable Outstanding increased by 2%, reaching 70 days and totaling €460 billion in payables. This combination resulted in an overall deterioration of the cash conversion cycle by 4%, which now stands at 44 days.

Industries that rely on fossil fuel energy faced significant challenges and resorted to strategic purchases to secure energy supplies and mitigate cost increases in the face of geopolitical unrest. This preemptive build-up of inventories led to a notable increase in DIO in these sectors.

Prioritizing Gen AI capabilities

Given ongoing geopolitical uncertainty, the moderate return of economic growth, and high interest rates, the need for effective working capital management is more important than ever. And given the transformation that generative artificial intelligence (Gen AI) will have on business operations, companies must target and prioritize Gen AI capabilities to optimize cash collections and credit cycles, and better anticipate customer demand and inventory needs.

The negative trend is very worrying for European companies, as macroeconomic uncertainties and inflationary pressures are expected to continue and place additional strains on working capital management. Persistently high interest rates have significantly increased the cost of capital tied up in current assets compared to previous years. The good news: Gen AI is opening up new opportunities to optimize working capital.

Conclusion

Georg Bach, MD Central Europe at The Hackett Group®, also takes the purchasing department into account: “Purchasing makes a significant contribution to improving a company’s liquidity: strategic procurement, supplier management, support with demand forecasts or the use of effective procurement practices in inventory management play an important role in optimizing working capital management.”