£110 Billion of Excess Working Capital is Sitting on UK Balance Sheets

Companies may already have the cash they need, with working capital equating to 10% of the total annual revenues for the entire FTSE 100

Companies must address this to remain competitive

London, 17 December 2009 – UK companies are sitting on as much as £110 billion of excess working capital on their balance sheets according to a Booz & Company analysis of 202 publicly traded companies with combined annual revenues exceeding £1.2 trillion. This figure is the equivalent of over 5 times the original 2009 UK economic stimulus of £20 billion announced in 2008. By neglecting this opportunity, companies miss an essential source of funding for research, development, and operational innovation which are required to maintain competitiveness in a global market.

The Booz & Company analysis looks at three components of working capital: receivables, payables, and inventory across 31 industry sectors.  Top quartile performance was identified for each sector, and the gap between the laggards and top performers was evaluated to determine the opportunity. The findings also identified four key levers that companies should use to improve their working capital performance:

  1. Align incentive structures to reward cash management. By borrowing a page from the private equity play-book, publically held corporations can create liquidity by incentivizing management to address short and long term opportunities.
  2. Effectively rebalance supply and demand requirements. Through process (e.g. Sales and Operating Planning), supply policies (e.g. batch sizes) and commercial levers (e.g. promotion and pricing practices, ordering) companies can move excess inventories and avoid over-building.
  3. Optimise end-to-end supply-chain structure. Cash optimisation requires revisiting traditional supply chain trade-offs, especially for extended global supply chains. In some cases, the cash tied up in inventory could more than fund the development of local production facilities. Additionally, shifting trade-credit to where the cost-of-capital is cheapest, or gets the best return, can significantly impact income statement performance.
  4. Consider overall choice of business model. Thinking radically about architecture or operating philosophy can have profound impact on working capital, for example pull vs push, or agreements on financing with third parties. It is not surprising that stellar performers in the high-tech sector have top-quartile working capital performance (e.g. Apple) as their business model choices are radically different.

“When capital is scarce, making better use of working capital is not merely a matter of improved practice,” says John Potter, Partner at Booz & Company in London. “Companies risk their competitiveness, in fact their own survival, by neglecting the cash available at home”.

To help companies determine if there is an opportunity to improve working capital performance, Booz & Company has created its Working Capital Profiler, an online evaluation tool that analyses the working capital positions of hundreds of leading companies across multiple sectors.  Companies can quickly assess their standing against their industrial peer group to quantify the value released by improving performance.

“For those with an opportunity to gain liquidity, the key question is how to improve?” says Lee Talbert, Principal at Booz & Company and author of the Working Capital Profiler. “It is essential to challenge long-held assumptions and assess opportunity across the entire scope of the operation in order to avoid sub-optimisation.”  Experience shows that a cross-functional executive team typically which approaches to the company’s working capital deficiencies produce the greatest returns.  To conclude, Talbert says “Pushing the working capital agenda can catalyse change across a company; it’s a great way to wake up a sleepy organisation.”