Poor Working Capital Management in UK

According to the latest reports, the U.K.’s largest companies have failed to free up to £125 billion worth of cash in the past five years.

This is all down to inefficient and poor working capital management throughout the UK. This compares to £400 billion – which was raised across Europe.

This study was carried out by Cash for growth, and it revealed that none if all of the UK companies that had bad full performers had improved – to just some level. They could have potentially created £125 billion worth of cash, which relates to 22% of sales.

The survey looked at working capital as a percentage of sales of the largest 4000 companies in around 34 different European countries between 2007 and 2011.

The survey looked at splitting the companies into the best and the worst performers. It basically found that those that had better working capital got better improvement statistics, and those with the least well-managed working capital got worse.

Robert Smid, who is a working capital partner at PwC commented, “Working capital presents a huge opportunity for companies to release cash from their balance sheets and operate more effectively. Managed well, it enables growth without additional funding requirements. Good performers are able to fund their own growth and release cash, while the bad performers have to find additional capital to fund their growth. Assuming the recession will eventually end, working capital performance is going to be crucial for companies wishing to fund their own growth. The working capital requirement in a growth period can actually be a multiple of sales growth, and having an adequate level of working capital often represents an additional challenge for growing businesses. Therefore, companies have to take extra care as the European economy enters a recovery.”

Simon Boehme, PwC working capital management senior manager, also commented on the study, “Successful companies move away from short term year end window-dressing towards more sustainable levels of good performance, where every day key decisions are made with cash in mind. Put simply, those organisations with an embedded cash culture fare better. There is no silver bullet to achieving good working capital performance, but the key is to delve into the detail and small day-to-day operational activities. The route to successful management of working capital might sound like common sense, but in reality we often see half-hearted attempts at improving working capital which barely scratch the surface. This is largely due to the fact that companies either do not have the bandwidth or the resources, or they lack the necessary skills and technical expertise.”

Working capital is key to well performing companies, the survey concludes. For a brighter future, this must be focused on over the next few years.

Resources:

http://www.unitedkapital.co.uk/

http://www.unitedkapital.co.uk/working_capital.html