Small and medium businesses improve working capital performances

08 November 2017 Consultancy.uk

Small and medium sized businesses have improved their working capital performance, with cash-to-cash days for the segments falling by 0.9% and 4.5% respectively. The research further noted that cash flow remains important to business performance, as the companies that are able to focus on C2C day improvement also tend to be the companies that have improved EBIT margins.

Grant Thornton has released its latest report into the ability of UK firms to manage their working capital, which the firm’s previous report showed to have a potential positive knock on effect on growth. The latest report explores year-on-year changes to working capital performance, for more than 3,000 companies, across 10 sectors – with company revenues in the range of £100 million to more than £1 billion.

The headline results show that businesses surveyed have around £136 billion in cash tied up in working capital on their balance sheet. Overall, the study continued to find correlations between working capital improvements over a three year period and EBIT margins five times higher than the competition – with 11% of the surveyed group having managed to increase their performance for three consecutive years.

Five-year trend in C2C days

The research also found that, on average, large corporates are under-performing smaller and medium sized firms, in terms of both working capital and profitability trends. Additional figures highlight a 9% increase in balance sheet debt accumulation to a five year high of £1.16% trillion, and an 8% decline in profitability year-on-year, based on EBIT margin outcomes.

Trends in cash-to-cash days, a measure of the cash conversion cycle relative to sales, have continued to improve on average, falling by 1.1 days to 30.5, which is down considerably on 12/13, when it stood at 33.4 days. The improved performance added around £8.8 billion in additional cashflow onto company balance sheets across the surveyed group.

This average hides considerable swings, however, as companies that improved their performance did so by 14 days on average, equivalent to around 4% on their annual revenues or £35 million of additional cash flow. In addition, the companies saw their profitability improve by 6% year-on-year, while the rest noted deterioration.

Company size C2C days

The study further sought to identify which types of businesses have managed to book the largest improvement to their cash-to-cash days. Small enterprise improved the most, up 4.2% on average to 33.3 days. Medium enterprise is now out performing large enterprise, with C2C days falling 0.9% to 23.8, and deteriorating 1.2% to 24.6 days respectively.

Large companies face a host of concerns around macroeconomic conditions, including currency volatility, which has pressured their ability to manage their C2C days – as its priority fell to lower levels. Small businesses, meanwhile, have focused increasingly on managing C2C days to remain competitive in an increasingly difficult environment.

C2C quartiles by sector and changes by sector.

The gap between top and bottom performers is closing, which is highlighting pressure on those of median performance. This is particularly true in construction and business services, where C2C days have fallen by 4.6 and 4.5 respectively. Utilities and pharmaceuticals are the areas in which the biggest net growth was noted, at 2.5 and 1.1 respectively.

Mark O’Sullivan, Partner and head of working capital advisory at Grant Thornton, 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.”

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