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UK Working Capital Study

New research – UK Working Capital study from leading business and financial adviser Grant Thornton UK LLP has identified a 3% year-on-year improvement in the working capital performance in a sample of over 3,000 UK companies with revenue of at least £100 million. However, the research suggests this improvement is largely being driven by a smaller cohort of companies, and nearly half (48%) have experienced a deterioration over the past year. This has resulted in up to £136 billion in cash tied up on the balance sheets of companies, which could be unlocked for further growth.

The research suggests that sustainable improvement in working capital arrangements has been an elusive aspiration for most companies, as only 11% of those reviewed demonstrated working capital performance improvements for three years consecutively.

Encouragingly, over the past year, the analysis suggests companies have made positive strides in improving their cash-to-cash days (a measure of the cash conversion cycle, relative to sales), from 31.6 days to 30.5 days. This 1.1 days improvement has delivered £8.8bn of cash to the balance sheets of the UK corporates sampled.

Stratifying the corporates sampled by Large (+£1bn revenue), Medium (£500m - £1bn revenue) and Small (£100m - £500m revenue) shows a growing disparity between the three groups. Whilst large corporates have historically kept tighter controls over their cash-to-cash days, this year it is the medium sized companies who showed the most improvement, whereas the larger segment of the sample deteriorated for the first time in four years. Smaller companies, faced with the continued challenge of reducing cash reserves and unfavourable macroeconomic conditions, show another year of improvements in a push to remain competitive.

Mark O’Sullivan, partner and head of working capital advisory at Grant Thornton UK LLP, commented: “UK corporates have faced unprecedented uncertainty following the result of the referendum to leave the European Union. The impact of this in both political and economic terms ranges far and wide, from currency fluctuations to import duties and trade tariffs; but the old adage that ‘cash is king’ still rings true and if these macroeconomic factors are going to impact UK corporates, it is the ultimate cash flow impact that will be hurt the most.

“In the context of working capital, these uncertainties simply increase the need for companies to provide the right level of focus. Although companies will have a number of competing priorities, not having working capital on the agenda could prove most costly of all.”

Analysing cash on hand balances, this year is the first time in five years that cash balances have decreased. Coupled with improvements in working capital and a five year high in corporate debt positions to £1.16 trillion, this suggests corporates have increasingly focused on investment for growth, utilising cash reserves and taking on debt to fuel development ambitions over the past year. This is further evidenced by marginal (0.1%) growth in dividend pay-outs, a 3% increase in capital expenditure (capex) and increased merger and acquisition (M&A) activity, totalling c.£120 billion, excluding financial services.

O’Sullivan continued: “It’s encouraging to see that companies are investing in growth at a time of such macroeconomic uncertainty. Once the dust has settled and we know in more tangible terms what Brexit will look like and what it means for the economy, those firms that are positioned for growth will undoubtedly be best placed to capitalise on opportunities at home and in markets abroad, and weather any potential storms on the horizon.”