£136bn tied up in UK corporates’ balance sheets, says study

A sustainable improvement in working capital arrangements is an elusive goal for the majority of UK companies, according to Grant Thornton

UK corporates have tens of billions of pounds’ worth of untapped potential tied up in their balance sheets, according to accounting firm and consultancy Grant Thornton.

In a study of 3,000 businesses with revenues of £100m or more, the firm identified a 3%, year-on-year improvement in their working capital performance.

However, that was driven mainly by a small cohort, with almost half of the sample (48%) experiencing a deterioration.

As a result, there is now £136bn in cash tied up in the companies’ balance sheets, which could be unlocked for future growth.

The research suggests that a steady and sustainable improvement in working capital arrangements is an elusive goal for the majority of UK companies, as only 11% of firms in the sample consistently achieved such a boost over the past three years.

Encouragingly, the study suggests, firms have made positive strides in the past year towards improving their cash-to-cash days (a measure of the cash-conversion cycle, relative to sales), from 31.6 days to 30.5 days.

This has delivered £8.8bn of cash to balance sheets across the sample.

In a statement, Grant Thornton noted: “Stratifying the corporates sampled by large (£1bn+ revenue), medium (£500m to £1bn revenue) and small (£100-500m revenue) shows a growing disparity between the three groups.

“While large corporates have historically kept tighter controls over their cash-to-cash days, this year it is the medium-sized companies who showed the most improvement, whereas the larger segment of the sample deteriorated for the first time in four years.

“Smaller companies, faced with the continued challenge of reducing cash reserves and unfavourable macroeconomic conditions, show another year of improvements in a push to remain competitive.”

Turning to cash-on-hand balances, Grant Thornton points out that 2017 is the first time for five years that cash balances have decreased.

Coupled with improvements in working capital, along with a five-year high in corporate debt positions at £1.16 trillion, this suggests that corporates have increasingly focused on investment for growth, utilising cash reserves – and taking on debt – to fuel development ambitions over the past year.

Further evidence for that strategy comes from a marginal (0.1%) growth in dividend payouts, a 3% increase in capex and increased M&A activity totalling around £120bn – excluding financial services.

Grant Thornton partner and head of working capital advisory Mark O’Sullivan said: “UK corporates have faced unprecedented uncertainty following the result of the referendum to leave the EU.

“In the context of working capital, these uncertainties simply increase the need for companies to provide the right level of focus. Although companies will have a number of competing priorities, not having working capital on the agenda could prove most costly of all.”

O’Sullivan added: “It’s encouraging to see that companies are investing in growth at a time of such macroeconomic uncertainty.

“Once the dust has settled and we know in more tangible terms what Brexit will look like and what it means for the economy, those firms that are positioned for growth will undoubtedly be best placed to capitalise on opportunities at home and in markets abroad, and weather any potential storms on the horizon.”

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