Companies should revisit lessons from 2008 financial crisis to tighten up working capital amid Brexit uncertainty
THERE is a €1.1trn opportunity for companies across the world to release cash from one of the cheapest sources available, working capital.
This is the finding of a PwC review of global working capital performance of more than 13,000 businesses. The review over a ten year period ending at 2015 year-end financial statements (latest data available) revealed a working capital opportunity of £28bn for 450 UK businesses collectively.
The UK’s working capital performance has improved for two years running, with the existing working capital within businesses reducing in 2015 by £14bn, compared to 2014 when it stood at £124bn. The UK’s performance outpaced those of global counterparts with less time spent on waiting for invoices to be paid and paying bills 16% lower than the global average in 2015 [UK 36.6 days, Global 43.4 days].
Impact of UK vote to leave the EU
The review is based on company year-end accounts, therefore data is not yet available for 2016. However, comparisons and lessons can be learned from the years following the 2008 financial crisis when considering the impact of the months preceding the EU referendum and the vote for the UK to leave the EU on working capital.
We could expect a similar reaction to Brexit as we saw during the financial crisis when companies were quick to tighten up working capital by holding minimal inventory and demanding prompt payment resulting in a net reduction of 6% in cash trapped in working capital. We may see a similar development in working capital being minimised as companies considered the impact of uncertainty.
According to PwC’s analysis, companies in the EU require more working capital to fund their operations than UK counterparts. This is revealed by a gap of nearly six working capital days (net time spent on waiting for invoices to be paid, inventory holding period and days to pay supplier bills), between the ten year working capital average days in Europe excluding the UK, and the UK (43.7 and 38 days respectively).
This gap is partly due to the higher number of engineering, construction and industrial manufacturing companies in the EU, which have high working capital requirements. The UK’s large retailers which generate a higher proportion of retail revenues than the EU help reduce the country’s total working capital requirements.
Daniel Windaus, working capital partner at PwC and lead author of the report, said: “Working capital is integral to a company’s operation and can provide a real competitive advantage by creating value as it improves free cash flow. Companies with poor working capital performance require more funding to grow, so it is in management’s interest to manage performance closely.
“Companies are in a period of uncertainty following the UK vote to leave the EU. Many lessons can be learned from the gains companies made in working capital management in the years following the 2008 financial crisis. Cash trapped in working capital has risen in the years since, indicating that companies should revisit the improvements they made then to release more of this cheap cash source.”