Brexit uncertainty is affecting UK corporate cash reserves but overall, companies are managing their working capital more efficiently compared to a year ago.

A study of 3,000 UK companies found they have as much as £136 billion in cash tied up on their balance sheets. The study on working capital looked at a sample of more than 3,000 large UK corporates and found that almost half (48 per cent) have seen their working capital efficiency deteriorate in the past year. But overall the companies, all of which have revenues greater than £100 million, have seen working capital efficiency improve by 3 per cent year-on-year, according to Grant Thornton's UK Working Capital study.

Brexit impacts corporate cash

The study also found that companies have been able to improve their cash-to-cash cycle from 31.6 days to 30.5 days, which meant an additional £8.8bn of cash on the balance sheets of the 3,000 UK corporates in the study.

UK companies have had to operate in an uncertain environment since the UK referendum in 2016, with fluctuating FX rates and uncertainty over import duties and trade tariffs. According to Grant Thornton's Mark O’Sullivan, this environment has focused the need for companies to ensure efficient working capital cycles. He noted there is a five-year high in corporate debt positions in the UK (now at £1.16 trillion), suggesting that companies are taking on debt and using their cash reserves to invest in their future growth. O’Sullivan added: “It’s encouraging to see that companies are investing in growth at a time of such macroeconomic uncertainty. Once the dust has settled and we know in more tangible terms what Brexit will look like and what it means for the economy, those firms that are positioned for growth will undoubtedly be best placed to capitalise on opportunities.”

Some of the study's key findings include:

• 11 per cent of companies have managed to achieve improvements in working capital for three years consecutively;
• EBIT margin performance is five times higher for companies that achieve three years of consecutive improvements in working capital;
• the level of cash on hand decreased for the first time in five years across UK companies to £254 billion;
• £136 billion in cash tied up in working capital on the balance sheets of UK corporates;
• large corporates are under-performing their small and medium-sized peers in year-on-year working capital and profitability trends;
• there has been a 3 per cent improvement in the cash-to-cash cycle year-on-year and a 9 per cent increase in year-on-year balance sheet debt.

Five steps to optimise working capital performance

The study also included these tips on how to optimise working capital:

1. Make working capital a strategic priority, with the right level of focus and support from senior management.
2. Understand what good looks like for your organisation, with consideration of your sector, size and use of relevant benchmarks.
3. Embed simple processes and controls such as standard payment terms and exception processes, and proactive collection procedures to provide improvements in working capital, or at the very least, protection from deterioration.
4. Develop and embed operational level metrics and KPIs that allow regular tracking of working capital performance, that can be understood by those in the business who have the ability to influence performance day-to-day.
5. Push the boundaries of best practice, using enablers such as supply chain finance and automated, data focused solutions that support inventory management.