New research from leading business and financial adviser Grant Thornton UK LLP suggests that there is over £125 billion of excess cash tied up in working capital for UK headquartered companies that could be released through better focus on cash flow management.
Despite the trend towards better working capital performance, the firm's latest Capital Thinking report identifies a significant opportunity to further unlock growth potential.
The report looks at the working capital performance of over 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 £75 million), 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 LLP, commented: "Cash is the lifeblood of business: get it right and survive, get it wrong and risk failure. The dislocation in capital markets in 2007/08, 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. The research highlights that delivering £1 million of turnover growth for a large company requires an additional £38,000 of cash investment in working capital. Whereas, 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 £1 billon) 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 continued: "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."
For a copy of the report, please follow this link.