UK companies sat on £69bn of excess working capital for the 2012 financial year, according to analysis by Deloitte.
This is equivalent to a free cash injection worth 5% of the total income of the firms analysed. Typically, excess working capital is tied up with inefficient financial and operational processes.
Andrew Harris, partner in Deloitte’s finance transformation group, said: “The effective management of working capital can easily be overlooked, especially when the focus is on generating new growth. Yet this is a good time to focus on managing basic processes, as it could free up cash for investment. Last year’s increase is due in part to a shortening of supplier payment periods, as well as being a by-product of growth.”
Deloitte’s report, Working Capital: UK plc’s unproductive £69 billion, looked at the performance of UK listed companies with turnover greater than £60m. The report found unlocking this excess working capital would be the cheapest source of finance to protect or grow shareholder value, rather than a bank loan or equity bonds.
Companies in the UK are becoming less efficient in the cash conversion cycle (the number of days between disbursing cash to collecting cash), with small businesses (annual turnover of less than £300m) deteriorating at the fastest rate. The report highlights that 68% of cash is held by the top 11% of UK companies, a group able to negotiate terms in their favour with smaller suppliers.
Meanwhile, the eurozone crisis has caused European businesses to reduce their working capital excess more effectively than those in North America. While Europe reduced its days in inventory (inventory into sales) by an average of 3% on last year, North America’s days in inventory increased by the same amount.
Sally Percy is editor of The Treasurer