Working capital delays puts companies’ profits at risk

The uncompromising report, compiled by Hackett-Rel, highlights the fact that working capital remains a serious problem for businesses, despite their lofty perches in the FTSE 350.

Hackett’s survey analysed Europe’s 1,000 largest companies and uncovered troubling statistics as it showed some businesses had to spread their resources very thinly over a long period of time, causing major headaches for FDs and their staff.

Hackett’s data, prepared for Accountancy Age, shows that Bovis Homes had among the worst problems. The company had a days working capital (DWC) figure of 497.9 for 2005, signifying the number of days their working capital would last before investment returns would come in.

The FTSE 250 company turned over £759m in 2005.

Other poor performers included Imperial Tobacco at 198.6 and Signet Group at 210.4.

The figure gives a direct correlation between a company’s net working capital and its sales per day. Simply put, the lower the value for DWC, the less pressure exerted on the company while waiting for profits to materialise.

Across a number of sectors, including advertising, aerospace, home construction and the tobacco industry, businesses are clearly having to think long-term as working capital becomes a millstone around their necks.

Hackett said that the relationship between the buyers and suppliers played a significant part in a company’s financial health. Top performing companies often had their suppliers over a barrel, raking in profits, while invoices were outstanding.

Andrew Ashby, President of Hackett-REL Europe said: ‘A strategic approach to working capital improvement will yield greater sustainable long-term results, than the potential short-term impact gained from squeezing suppliers.

‘Our view is that treating suppliers as you would expect to be treated by customers will yield long-term benefits, especially in periods of an improving economic outlook. This is certainly the case when you need to call upon those suppliers to fulfil periods of high demand. The success of your business then becomes reliant on their flexibility, which is tied to your working relationship. If your behaviour towards them has historically been adversarial then they are unlikely to sympathise or respond to your needs.’

COMPANY REPORTS

Major sell off

Barclays’ has sold off a major arm of the business to a US company. As the banking heavyweight prepared to offload the UK and Germany arms of its vendor finance businesses to finance firm CIT Group Inc, group CFO Naguib Kheraj, said: ‘This transaction leaves Barclays Asset & Sales Finance well positioned for its future development.

Significant investment will be focused on its core asset and sales finance business including the ongoing expansion of its successful direct leasing business. The future strategy of the vendor finance businesses is now best pursued within a specialised leading global provider of asset finance solutions.’

The gross assets of the UK and German operations came to around £1.1bn as at 30 June 2006, about 12% of Barclays’ total gross assets. Almost 60% of the assets to be sold came from UK activities, with the balance in Germany. The completion of the sale depends on clearance from the relevant regulatory authorities and is expected to close at the end of 2006.

High earners

A survey by Deloitte has found that the salaries of company directors at the UK’s biggest listed companies rose by an average 6.8% over the past year. According to the firm, a FTSE 350 executive director is now paid an average salary of £350,000 a year, up by £23,800 in 2005.

The rise is slightly more than last year’s 6.5% and ends a five-year decline in salary growth rates. The results show that senior executives are stretching even further ahead of the overall workforce, where pay rose by just 3.9% on average. Bill Cohen at Deloitte, said: ‘While these higher bonus payouts may ra ise eyebrows, it is important to look at the performance of the FTSE which, over the same period, increased by 18% compared with 9% the year before.’

Clipping its wings

The chief executive of airport operator BAA has warned that a green tax on flying will damage the economy and will not have the desired effect on the environment. Speaking at the Conservative party conference, Stephen Nelson claimed a carbon emissions trading scheme was the best option for mitigating the environmentally damaging effects of flying. ‘A tax to price people out of flying would not deliver the required environmental result. It would also damage people’s quality of life,’ Nelson said.

According to Nelson, an emissions trading scheme would be effective and popular. Support is growing for a further tax on flying with airplanes accounting for 2% of global carbon emissions, which is expected to rise to 15% by 2050, according to reports.