UK businesses improve working capital performance

BRITISH companies are reaping the benefits of improved working capital thanks in part to invoicing their clients and receiving payment faster than at any time since the financial crisis.

That’s one of the key findings to emerge from a review of UK working capital performance, conducted and published by PwC.

Outperforming their European counterparts, UK firms have delivered significant improvements in their ability to convert earnings into operating cash flow, the Big Four firm’s report discovered.

Twelve out of 16 sectors studied have improved working capital performance since 2010, with only engineering, chemicals, entertainment & media and aerospace trailing the field.

But £24.2bn could still be released from UK balance sheets by further improvements in working capital performance.

It found that improved customer payment was down to more effective collection processes, such as digital invoicing and improved customer payment terms.

Regionally, the West and Wales had the highest working capital ratio with the most cash tied up in its supply chain and customer transactions. Businesses in the North found it hardest to turn earnings into cash, while Scotland witnessed the steepest fall of net working capital (NWC) in the last five years.

Smaller businesses took the longest to collect cash after sales when measured in Days Sales Outstanding (DSO), and longer to convert their inventory into sales when measured in Days Inventories on Hand (DIO). They also take far longer to pay their creditors when measured Days Payables Outstanding (DPO).

However, UK companies as whole delivered the strongest DSO – or receivables performance – in five years with a 3.2% improvement to 38 days in 2014, but it’s not known if this was driven by improved customer payment terms or by more effective collection strategies, or a fusion of the two.

Daniel Windaus, PwC partner, said: “The one key driver of performance across industries and geographies, is whether a company structurally focuses on cash generation rather than undertaking short term actions.

“Significant gaps between the top performers exist in every industry sector. The good are getting better and the bad are getting worse.”

It found that across the board, companies with better working capital performance have lower capital investment and debt ratios.

The report also unearthed the truism that while many companies still consider the ‘receivables’ process as starting once an invoice falls due, the top performers focussed their energy across the entire order-to-cash cycle, from customer take on and contract negotiation – including payment terms and special billing arrangements – to billing timing and accuracy, to proactive customer contact and dispute resolution and root cause eradication.