There could be over £125bn of excess cash tied up in working capital for UK headquartered companies that could be released through better focus on cashflow management, according to research from Grant Thornton (GT), but companies continue to pay small suppliers late and negotiate punitive supplier contracts
The firm's ‘Capital Thinking’ report examined the working capital performance of over 4,000 UK companies with an annual turnover of over £75m, and found they held an average of £21.5m excess working capital, which could be released to support growth without affecting operations.
Mark O’Sullivan, partner and GT’s head of working capital advisory, said: ‘The dislocation in capital markets in 2007/08, and the subsequent economic recession, forced companies to drive cash flow in order to survive. 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, according to GT. The research highlights that delivering £1m of turnover growth for a large company requires an additional £38,000 of cash investment in working capital, while for small companies this funding requirement nearly doubles to £73,000.
Despite this disparity, GT says 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 (PE) backed companies are more likely to maintain efficient working capital levels. The analysis identifies a sample of over 100 PE backed companies for whom the average levels of net working capital were 64% lower than the total company average.
O'Sullivan said: ‘What is clear is that although a company's size, sector and ownership structure will all have a key role to play in driving their working capital requirements, the winners will be those who achieve the right level of organisational focus and commitment to cash generation.’
Separately, research from online accounting software specialist Intuit suggests that the UK’s smallest businesses are finding it harder to build up working capital because of ongoing payment delays.
Intuit’s research found that UK micro-businesses (those employing under ten staff) are owed over £16.9bn by customers, and says prompt payment problems are having a major impact on cash flow. A third (32%) of respondents said they have had to take on loans or credit to pay suppliers and wages.
