Our annual survey of more than 3,000 public and private UK companies highlights a liquidity imbalance, which threatens to starve dynamic, fast growth companies of the working capital needed to accelerate growth in the UK economy
Our annual research study into the cash and working capital requirements of the UK economy – released later this month – reveals a growing cash conundrum.
Across the globe companies are building up cash reserves. In the UK, total cash on hand has risen by 14% since 2010. However, that is only half the picture since the majority of this cash sits in the bank accounts of a relatively small number of corporates. The conundrum is that a better distribution of cash to support the working capital requirements of fast-growth, dynamic organisations could materially improve growth prospects for the UK economy as a whole.
So, in an unprecedented low interest rate environment, why are large companies so keen to hold cash on their balance sheet?
Why hold cash?
Since 2008 and triggered by the global financial crisis, major global economies have experienced a period of sustained volatility and uncertainty. In the UK, this uncertainty has been compounded by the vote to leave the European Union.
In the short-term there has been currency volatility, resulting in a significantly weaker pound, which will have positive or negative cash flow impacts for companies dependent on their balance of trade. Views on the medium and long-term impacts of Brexit differ significantly, which brings ongoing uncertainty.
This continual volatility lies at the heart of the trend for stockpiling cash on the balance sheet. Boards are actively choosing to overlook the fact that cash deposits attract minimal returns (and very soon may start to incur bank charges) in favour of having the confidence to manage future economic shocks or turbulence.
Liquidity imbalances across UK
While retaining cash is understandable, this imbalance in liquidity across the UK economy is creating a challenge for those companies seeking to grow at an accelerated pace.
Our study identified that improvements in working capital allowed dynamic companies across a range of sectors to achieve levels of profitability growth that far out-strip the UK corporate average. This growth feeds into job creation and can have a multiplier impact throughout the UK economy due to increases in consumer spending.
The challenge is: how can we support a greater volume of ambitious companies in accessing the working capital they need to maximise their growth and fulfil their potential?
Delivering sustainable working capital improvement
A potential first step to solving the liquidity challenge is for companies to examine their own working capital practices to see if these could be optimised to release cash.
Our benchmarks highlight more than £135 billion of excess working capital sitting on the balance sheets of UK companies. Consider the impact that releasing only a portion of that working capital could have on the UK's cash conundrum.
Companies often fail to pay attention to the more straightforward tasks of streamlining internal processes and controls, which can often deliver material improvements in working capital. We also frequently note an absence of an effective strategy to manage commercial payment terms negotiations with both customers and suppliers.
For those companies that act on such initiatives, the improvements are usually transformational. Companies that we have worked with report reductions in their overall working capital requirements of between 10% and 20% of the value of gross working capital, or between 5% and 10% of annual turnover.
There is also clearly a place for more structural financing solutions in the form of bank debt and in the increased availability of supply chain finance solutions opening up to mid-sized companies. Careful planning and high quality implementation lie at the heart of any successful supply chain finance programme.
Long-term cash conundrum
The simple answer to the UK's cash conundrum is that there is no obvious, instant fix. The emphasis remains on individual companies to both plan for and optimise their cash and working capital requirements. You can read more on our Working capital and cash page.
As part of Grant Thornton's focus on creating a Vibrant Economy we will be seeking to bring stakeholders from across the UK together to engage in a debate aimed at looking at potential longer-term solutions.
Our full-length research study will be released later this month and will include further insights and analysis into the working capital performance of more than 3,000 UK companies.