For businesses both large and small, access to short and long-term working capital can often be a challenge. Our recent study showed that UK companies are sitting on £69 billion of excess working capital for financial year 2012. 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. The effective management of working capital can easily be overlooked, especially when the organisations focus is on generating new growth. However, this could be a good opportunity to focus on managing basic processes and perhaps an opportunity to free up some cash for investment. Last year's increase in working capital is partly due to a shortening of supplier payment periods, as well as being a by-product of growth. Our study found that unlocking the 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.
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.
*Cash conversion cycle refers to the number of days that it takes from disbursing cash to collecting cash
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