New analysis of the UK Working Capital study from leading business and financial adviser Grant Thornton UK LLP has identified a 6% year-on-year improvement in a sample of 290 UK food and beverage companies with a revenue of at least £100 million.
This equates to £1.2 billion in additional cash – double the industry average (3%), showing that the sector is leading the field in terms of working capital optimisation.
As a general trend, the top performing and median companies in the whole sample of 3,081 businesses are improving year on year, so the performance gap between them and the bottom quartile companies is increasing. The businesses that are not focusing on working capital are in danger of falling further behind their peers.
This means that there is significant potential for further improvement within the sector. Grant Thornton’s analysis estimates that food and beverage companies could access up to £7.3 billion of cash by raising performance to the median standard.
Sustainable working capital improvement has proved more elusive. Only 10% of food and beverage firms were able to improve their working capital performance for three consecutive years. This is in line with the overall average, which saw 11% of companies reach this target.
Trefor Griffith, Head of Food and Beverage at Grant Thornton UK LLP, said:
“The food and beverage sector plays a huge role in the British economy in terms of value, jobs, global branding and creativity. Despite its many successes, the sector faces economic and regulatory uncertainty. Brexit is a major factor, but advancements in technology and evolving customer habits and tastes are also disrupting the status quo.
“In the current environment, it is more important than ever for food and beverage businesses to boost their balance sheets. Whether it is cost reduction, better access to finance and greater flexibility to investing for growth, better management of the balance sheet creates opportunities for growth.”
Five ways food and beverage businesses can improve working capital
- Review your payment terms – check whether you are paying suppliers too early
- Review your stock optimisation and replenishment policies – almost half (£3.5 billion) of the additional cash we predict could be released comes from inventory. Are you overestimating demand and therefore have surplus stock?
- Collaborate with your supply chain to optimise demand planning – demand can be regulated by working with suppliers on a more collegiate basis. The automotive sector is a good source of best practice examples for this.
- Analyse demand to inform decisions – Dedicate time and resource to identifying the root causes of sales spikes and determining how they are generated. Diageo take this so seriously that it has a dedicated unit in its central finance department.
- Treat technology as an enabler, not a solution – tools like big data analysis and automation are valuable tools in managing working capital but it’s a mistake to turn to technology before you have the right processes and communication channels embedded in the organisation.