To unlock working capital, CEOs must understand the processes in their businesses that will do this says Adam Simpson, Commercial Director at Liquidity Club.
Political uncertainty over the last three years has seen UK companies turnover slow down while spending increasing amounts of working capital on the process of stockpiling. This is proving to be a dilemma for those CEOs who want to take their company to the next level.
Cashflow under pressure
The latest Working Capital Index report by Lloyds Bank shows that a third of firms surveyed by IHS Markit said managing working capital, in the context of political and business uncertainty, was "the biggest concern for the year ahead", prior to the political verdict on 31st January.
Further figures show that 29% of manufacturers who took the survey said they were holding more stock - presumably because of any disruption caused by Brexit. Stockpiling puts the company's cash flow under significant stress and is funding that could be spent on expanding the business. It also affects changes to a business's operating model. One firm mentioned in the Lloyds report said that it has established a new warehouse so that it could better manage its supply chain in Europe.
Short term gain - long term pain?
In May 2019, the CBI Industrial Trends Survey (Link CBI) proved that 35% of firms said their present stocks of finished goods were more than adequate, whilst 9% said they were less than adequate, giving a balance of 25% – the highest balance since March 2009 and noticeably above the long-run average (+13%).
However, there remains a dichotomy here as many firms surveyed by Lloyds expected the stock to run down next year, meaning they are impacting their cashflow now for relatively short-term gains.
Stockpiling is expensive for businesses, however, it has previously boosted GDP growth in late 2018 and in the first six months of this year. However, many fear that it will have an impact on growth and GDP figures for the rest of the year. With this in mind, it would not be a surprise to see the UK economy experience slower growth than normal while companies use up the extra stock they now have.
A slowdown in turnover generation
The Lloyds Bank Capital Working Index shows that the near-9,000 companies that surveyed saw their combined working capital increase by almost 41% over the last four years - equivalent to £41.1bn. However, over the same period, revenue at the firms has only grown 20%, meaning that they are holding onto more working capital than is relative to their turnover.
Meanwhile, over the last three years, the report found that the average cash conversion cycle, a measure of working capital efficiency, for large firms has increased by over six days in the last three days.
These figures show demonstrate firms are holding higher levels of working capital and that generating turnover is taking longer. SMEs are taking seven days longer to tie up cash than their larger counterparts. However, this is down from a record high of almost 12 days.
The stockpiling of goods isn't an issue that is going away in the short-term, it seems. The Working Capital Index points out that high inventory levels have hit historic highs over the last quarter.
In 2016 the annual rate of growth was 12.6% however this reduced to 5.6% in 2018. This means that stockpiling is at the forefront of the mind for business owners.
Review every option
It now certain we are longer part of the European Union. Therefore preparation is crucial.
Cash flow and management of working capital is critical over the coming months, and now is the time to review your financing options and plan ahead for all eventualities this year.
Ask yourself this: do you have a full understanding of the processes in your business that will unleash the cash flow you need to make your business grow?
If the answer is no, then now is the time to take action to remedy this shortfall, as cash flow is critical when enacting change for your business.