Uk Lags in Cash Management Gains
Leading UK companies have �76bn (_113bn) of cash unnecessarily tied up in working capital and are losing ground to their continental European counterparts in the drive for efficiency, according to a report issued on Monday.
A survey of working capital at the UK's 250 largest companies, carried out by REL Consultancy Group, found that poor cash management is costing them �5bn in net profits annually.
The British companies reduced their working capital a measure of how much cash is tied up in payables, receivables and inventory by 4.4 per cent this year, but this lagged behind improvements by its largest counterparts in the eurozone.
By tying up resources unnecessarily, companies deny themselves opportunities to use their cash more effectively for investments or acquisitions.
Improvements in cash collection, shorter customer payment terms and inventory and supply chain management initiatives would typically raise the net profit of the companies surveyed by up to 19 per cent a year, reduce net debt by 44 per cent and improve return on capital by 15 per cent, REL estimated.
REL, which specialises in working capital improvement, estimates that the top 1,000 companies across Europe have more than �390bn tied up in excess working capital. However, German companies have cut their excess working capital by 6.5 per cent to �95.5bn, and working capital management in France, excluding the automotive industry, was 11 per cent more efficient at �73.6bn than last year.
The UK has historically had lower levels of working capital. Ann Cairns, global head of working capital at ABN Amro, said: "It doesn't surprise me, as the Europeans had much further to go. Their economies aren't as buoyant . . .so they have been on a drive to create efficiencies."
Companies ideally keep as little cash on hand as possible, but this is not always viable when they are heavily indebted. Marc Loneux, head of global research at REL, said one reason for the UK's underperformance was that the country remained outside the eurozone. "It has become more expensive and inefficient for UK companies doing business inside the eurozone. They are paid later by companies, they have to hedge their exposures. It is more than just transaction costs there are higher inefficiencies," he said.
Efficiency rates may also be falling in the UK due to companies emerging from the downturn that are now focusing on growth and have higher working capital requirements.
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