Over 90 billion of excess cash tied up in working capital

07 July 2015 Consultancy.uk

While the number of days that cash is tied up in working capital decreased, still around £90 billion of excess cash is still not being maximised across UK businesses, research by Grant Thornton shows. While working capital requirements differ for different companies and sectors, the firm stresses that improved focus on cash flow management could help companies access these billions.

Professional services firm Grant Thornton recently released the latest version of its Capital Thinking report, in which it discusses the findings of its research into the capital performance of more than 4,000 companies headquartered in the UK from 10 different key sectors*, examining the cash tied up in working capital.

Recent historical development in C2C days

Cash-to-cash
The cash-to-cash (C2C), or cash conversion cycle, calculates the time operating capital (cash) is out of reach when a company increases its investment in resources to obtain growth. In 2013/2014, the companies surveyed had an annual turnover of £3.4 trillion, which means that every day of C2C is worth £9.2 billion.

The report shows that while between 2010 and 2013 the number of C2C days increased from 24.3 to 25.4, recent developments show that the number was again down to 24.2 in 2013/2014. According to the consulting firm, this resulted in a release of cash of £11 billion. While this is significant, the companies, on average, still hold £21.5m excess working capital, which translates to an estimated £90 billion of excess cash tied up in working capital.

Tied up cash

Size does matter
According to the research, company size does matter when it comes to influencing working capital requirements, showing that the requirements for the largest companies are 45 % lower than for medium and small companies. In order to deliver £1 million of turnover growth, large companies will require around £38,000 of additional cash compared to £73,000 for small companies.

Although large companies seem to show the best performance, medium sized companies have been able to decrease their C2C the most in recent years, hereby showing the largest absolute improvement in their working capital performance. 

Development of C2C days by company size

Sector specific
The working capital requirements are sector specific, the research shows. The longest average C2C cycle is found in the pharmaceutical sector, where cash is tied up for 47 days, while the Technology, Media & Telecoms industry has the shortest average cycle of 0.1 days.

The biggest improvement in C2C days is seen in construction companies, which were able to decrease the cycle with 8.6 days, which translates to £2.5 billion, followed by companies in the industrial products sector (-2.2 days) and mining (-2 days). The oil & gas industry experienced the biggest increase and saw the C2C cycle increase with 6.1 days.

Change in in C2C days by sector

Commenting on the result, Mark O'Sullivan, Partner and Head of Working Capital Advisory at Grant Thornton UK, says: “Cash is the lifeblood of business: get it right and survive, get it wrong and risk failure. […] What is clear is that although a company's size, sector and ownership structure will all have a key role to play in driving their working capital requirements, the winners will be those who achieve the right level of organisational focus and commitment to cash generation.”

* Business Services; Construction; Consumer Products & Services; Industrial Products; Mining; Oil & Gas; Pharmaceuticals; Public Sector, Health & Education; Technology, Media & Telecoms; Utilities.

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