Partner Article

UK businesses “sitting on £64m” in excess cash

Businesses in the UK are sitting on £64 billion in excess working capital, which, if released, could be used to fund business growth and overcome market downturns.

According to research by Deloitte, this excess capital is up from £61 billion in 2010 and £59 billion in 2009. However the survey also indicated that UK companies are also delaying payments to suppliers in order to help fund working capital. On average, suppliers were paid a week later in 2011 than two years earlier.

This may be beneficial in the short term, but could lead to future issues with supplier relations, costs and viability.

Paul Feechan, office senior partner at Deloitte in the North East said: “As the UK economy has technically entered a recession, cash and its effective use, will continue to remain high on the corporate agenda.

“To put the £64 billion figure into context, this is more than enough to pay the UK Government’s debt interest payments for the next 18 months.

“The paradox is that, with the appropriate focus, working capital can be one of the cheapest and most accessible forms of funding available to a business.”

For many CFOs increasing cash flow and reducing costs are major priorities, and many are now aiming to run higher cash balances than before the financial crisis - which means that the amount of excess working capital in UK plcs is still rising.

Paul continued: “The nature of working capital is such that effective cash management is important during recessionary periods to provide protection against market uncertainties, while in expansionary periods it can fund controlled growth.

“In the retail sector, working capital initiatives are being driven by the need to bridge gaps caused by downturns in revenue.

“Some sectors, such as pharmaceuticals are using the benefits from working capital programmes to fund industry consolidation and future growth.”

External factors are often cited as the primary drivers of working capital performance in these sectors, while focus on revenue and profit margins are often a key driver. However, Mr Feechan believes that business need to be confident about using their cash stocks.

It is our experience that a significant amount of working capital can be released without adversely impacting the underlying business,“ He added.

This was posted in Bdaily's Members' News section by Ruth Mitchell .