£60bn tied up in unproductive working capital

UK plcs are sitting on £60bn of unproductive working capital, according to research conducted by business advisory firm Deloitte

The study found that working capital (the amount of money a company requires to fund its day-to-day operations) is unnecessarily being tied up in a myriad of simple transactions.

Deloitte’s Global Review of Working Capital analysed data of more than 20,000 companies from across the globe over a five-year period.   Unproductive working capital was found to be tied up in basic accounting cycles, such as accounts receivable and payable processes.  Inventory and supply chain management were also noted as a key factor underlying poor working capital management.

Simon Adcock, partner in Deloitte’s Corporate Advisory team in Birmingham, said: “As the economy absorbs the full impact of the Spending Review, it is clear that cash and its effective use will continue to be high on the agenda.  While some companies have built up cash reserves, many others require additional cash to help them fund growth and, importantly, to pay down debt.  By reassessing how working capital is put to use and releasing the excess element as cash, many businesses will find themselves in a much stronger position to fund the future of the business.

“Working capital is the cheapest, and most accessible, form of funding available to a business. It is alarming that UK plcs are sitting on top of such a phenomenal amount of money and not reviewing how it’s really being deployed.  Optimising a company’s cash conversion cycle will mark the difference between the real winners and losers.”

According to Deloitte’s analysis, the consumer and industrial sectors have the most cash locked away in unnecessary working capital, with more than £13bn and in excess of £8bn respectively.

Mr Adcock said: “While structural reasons are often cited as the prime drivers of working capital in these sectors, an all encompassing focus on revenue and margin is often the key driver. It is our experience that a significant amount of working capital can be released without adversely impacting the underlying business.”

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