Latest UK working capital study highlights the benefits of optimising working capital performance.
A 3% improvement in the cash-to-cash cycle of UK companies has released £8.8bn previously tied up in working capital, according to Grant Thornton’s latest UK Working Capital Survey.
“Since the financial crisis, UK companies have placed an increased focus on the health of the balance sheet,” says Mark O’Sullivan, Partner, Head of Finance and Working Capital Advisory at Grant Thornton. “We see companies of all shapes and sizes evaluating and honing their processes to drive out cash tied-up in working capital.”
Reasons for improvement
There are multiple reasons that companies are focusing on improving their working capital performance. “From a strategic perspective, it allows businesses to drive more efficient profitability,” explains O’Sullivan. “This directly correlates to the market capitalisation of the businesses and is, therefore, a critical measure for shareholders.”
Better working capital performance is also proven to positively impact the bottom line. Grant Thornton’s research has highlighted that the 10% of companies that have improved working capital three years in a row have five times better EBITA performance than the rest of the sample in terms of profitability.
The reason for this, notes O’Sullivan, is that working capital is more than just a financial topic. “It is an operational topic and once you start improving processes across the operation it indirectly improves efficiency throughout the business and thus reduces costs.”
Freed up working capital is also helping businesses fund their investments. This was especially critical in 2016 as the Grant Thornton survey found that UK companies were investing more than in recent memory. “Last year was the first year in the past half-decade that corporate cash balances decreased – this is despite the extra cash unlocked in working capital,” says O’Sullivan. “Working capital is clearly the cheapest way to fund this investment and is a reason many organisations are focusing on this space.”
The rise of the middle market
Much of the working capital improvements made in 2016 were by the middle market (companies with a turnover of £500m to £1bn). “This is a reversal of recent trends,” says Dan Georgescu, Associate Director, Working Capital Advisory at Grant Thornton. “Typically, it has been large corporates and SMEs that have shown the most signs of improvement.”
The working capital performance of large corporates actually deteriorated in 2016. Grant Thornton suggests in the survey that this came about because UK corporates were distracted with other issues such as Brexit. Georgescu also suggests the results might be because of the increasing focus from regulators on corporate payment practices meaning that “the ability for corporates to leverage size when dealing with suppliers and customers has been clipped slightly”.
Either way, Georgescu is encouraged to see companies of all sizes and across all industries focusing on improving working capital. “Corporates have been looking at this space for some time and have made good progress,” he says. “But what we are seeing is middle market companies and SMEs learning from corporate best practice and driving significant improvements in their own working capital performance.”
Keys to a successful project
If any company is to be successful when looking to improve its working capital performance, O’Sullivan says that the project must be driven from the top down. “Those companies that achieve year-on-year improvements are those that prioritise working capital at the strategic level and shape it as an enterprise-wide project,” he says. “Those that have more volatile working capital performance tend to be those taking short-term technical actions – such as pushing out supplier payments – driven by a particular need within the business at a point in time.”
To help the whole business focus on taking actions that drive improved working capital performance, O’Sullivan suggests that companies make working capital KPIs directly linked to employee bonuses. “This will help drive cash consciousness throughout the business.”
Unlocking the future
O’Sullivan believes that UK plc will continue to focus on working capital over the coming years. SMEs will continue to make significant progress as they become more familiar with tools such as supply chain finance, he says.
Large corporates will also continue to drive improvement by continuing to optimise processes. The focus will be on improving payment collection, better managing inventory and evaluating sales and operational planning.