UK companies have over £125bn of excess cash tied up in working capital

Firms miss out on valuable funding for growth

UK-headquartered companies have over £125bn of excess cash tied up in working capital that they could release through better cash-flow management, according to business advisory firm Grant Thornton.

Although there has been a trend towards better working capital performance in recent years, the firm’s latest Capital Thinking report identifies a significant opportunity to further unlock funding for growth.

The report looks at the working capital performance of more than 4,000 UK companies and finds that, post-recession, companies are placing increasing value on their ability to finance growth through the release of excess cash tied up in working capital.

Despite this, the companies included in the research (with annual turnover of over £75m), held an average of £21.5m excess working capital, which could be released to support growth without affecting operations.

Mark O’Sullivan, partner and head of working capital advisory at Grant Thornton UK, commented: “Cash is the lifeblood of business: get it right and survive, get it wrong and risk failure. The dislocation in capital markets in 2007/8, and the subsequent economic recession, forced companies to drive cash flow in order to survive.”

He added: “As the economy has improved, the focus is on generating cash as a low-cost way to finance investment and expansion. Since working capital represents the cheapest form of finance available to a company, it’s perhaps unsurprising to see it as a board-level strategic priority for companies of all sizes.”

Company size is a major factor influencing working capital requirements. The research highlights that delivering £1m of turnover growth for a large company requires an additional £38,000 of cash investment in working capital.

On the other hand, for small companies, this funding requirement nearly doubles to £73,000.

Despite this disparity, one encouraging sign was that those companies classified as medium-sized (turnover of £250m to £1bn) delivered the largest absolute improvement in their working capital performance over the period covered by the review.

The report also finds that private equity-backed companies are more likely to maintain efficient working capital levels.

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