UK businesses sitting on £69bn of unproductive working capital – Deloitte

UK COMPANIES are sitting on £69bn of unproductive working capital for 2012, up 8% on the previous 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.

Excess working capital in UK plcs is on the increase from £64bn in 2011 and £60bn in 2010, according to the business advisory firm.

Paul Trickett, corporate finance partner for Deloitte in Yorkshire, 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 £69bn, looked at the performance of UK listed companies with turnover greater than £60mn. 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, 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.

Trickett concluded: “There are a range of process efficiencies, financial instruments or ways of outsourcing available to address this problem, without damaging relationships with suppliers. By using demand forecasting and effective planning techniques, it is possible for cash to be freed to use elsewhere. Streamlining excess working capital will enable UK businesses to take advantage of the economic recovery.”

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 inventory (inventory into sales) by an average of 3% on last year, North America’s increased by the same amount.