Leading companies in Europe and the US have up to $1,000bn in cash unnecessarily tied up in working capital, according to a new report on Tuesday.

The report by Ernst & Young highlights how an increasing number of companies are failing in the fight for cash unleashed by the financial and economic crisis to tap possible improvements in their working capital.

The management of working capital by changing payment terms to suppliers or from customers as well as cutting inventory has become central to many companies’ focus on a “cash is king” strategy in the current recession.

But they are still missing opportunities as the number of companies improving fell at the end of last year.

“Despite a much stronger focus on cash, the findings indicate plentiful opportunities for many companies to release additional liquidity from working capital. The amount of $1,000bn is equivalent to 6 per cent of sales for these businesses,” said David Sage, a partner for working capital management at the accounting firm.

Of the 2,000 companies surveyed in both regions only 43 per cent reported improved working capital performance in the final quarter of last year compared with 63 per cent in the US and 50 per cent in Europe for the full year.

Similarly, the cash-to-cash cycle – which measures how long companies need to finance themselves as they wait for payment from customers after paying suppliers – deteriorated in the fourth quarter.

It fell 7 per cent in the US and 3 per cent in Europe despite the full-year figures showing an improvement.

Steve Payne, a partner at Ernst & Young, pointed to the volatility in currency and commodity prices as a factor as well as the depth of the recession.

“Companies should pay more attention to working capital management when planning and executing their responses to a more challenging environment,” Mr Payne said.

The report also underlined how companies had failed to cut inventory as fast as demand had dropped.

Companies have been caught out by the speed of the plummet in demand and experts believe that could complicate the recovery as businesses struggle to react appropriately.

Ernst & Young estimates that companies that take a structured approach to improving working capital can improve their liquidity by 5 per cent of their annual sales.

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