Europe's largest companies left 762 billion euros ($1 trillion) of working capital unused in 2012, the equivalent of 6 percent of the European Union's GDP, according to a report published on Wednesday.
REL, a consultancy owned by Hackett Group, surveyed over 800 public companies and found that, on average, profit and free cash flow deteriorated year-on-year in 2012.
The ability of companies to convert sales into cash also slipped, the report said, and added that unpaid invoices represented the biggest constituent of excess working capital.
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"Cash conversion performance has been declining for three years in a row, showing that efforts in working capital management have not been sufficient to counteract the squeeze on cash generation," REL Managing Director Daniel Windaus said in the report.
"Add to this the increase in debt levels and it is clear companies need to be extremely alert to the possibility of interest rate increases and the impact these would have on debt leveraged portfolios."
REL noted a "clear and widening" gap between companies in the upper quartile of their industry and typical companies, with sector leaders operating with less than half the average working capital. They were able to collect payments from customers more than two weeks earlier than average companies, and paid suppliers two weeks later on average.
European companies' revenues rose by up to 6 percent last year, but gross margins fell by 3 percent, according to REL, indicating that companies spent more than in previous years to boost revenue.
—By CNBC's Katy Barnato