Working Capital 2013 UK plc s unproductive 69 billion

Transcription

1 2013

2 Executive summary 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 1

3 Executive summary 2. Te level of excess working capital increased Wat could your company do wit a free cas injection equivalent to 5% of annual sales? Tis is ow muc unproductive cas is tied up in te average UK company s working capital. 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Deloitte s annual working capital study as found tat total excess working capital rose to 69 billion in financial year, up from 64 billion in, sowing deterioration in performance. Excess working capital is te ceapest source of finance available to companies tat can be used more effectively to protect or grow sareolder value. Tis excess is due to a combination of several factors across finance, risk and supply cain management, impacting te accounts receivable and payable functions as well as inventory management. A greater focus on supplier collaboration and a relaxing of te approac to payables as driven te sortening of supplier payment periods and te decline in accounts payable performance. Companies ave made a concerted effort to manage customer payment terms and payment performance, wic as led to improvements in accounts receivable. Improvements in tis area were also a by-product of an increased focus on risk management troug te strengtening of credit risk processes. UK plc also acieved an improvement in inventory management, driven by a continued focus on supply cain efficiency. However, te opportunity remains to drive sustainable benefit across all working capital components, witout a detrimental impact on customer and supplier value and tose key relationsips. Excess working capital in UK plc rose 8% to 69 billion in. Size matters in te supply cain: Large companies continue to use leverage but smaller companies are closing te gap. European companies made te largest year-on-year improvements versus UK and Nort America. Not all companies are overflowing wit cas; te majority of cas is eld by a small number of companies. Investors are expecting an improvement in return on capital wit asset efficiency likely to contribute. Working capital optimisation can contribute to cas flow improvement, wic is still a ig priority for CFOs. Working Capital 2

4 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source In addition to internal pressures, businesses continue to be callenged to manage te impact of external working capital drivers, wit commodity and currency fluctuations in te year adding complexity and distorting performance interpretation in certain sectors. Large companies appear to be continuing to use leverage over customers to greater effect in reducing cas tied up in accounts receivable, via lower payment terms and potentially concerns over security of supply from customers driving quicker payments. Smaller companies are managing inventories more carefully tan larger peers wilst paying suppliers earlier tan in te prior year. Performance also varies at a regional level wit European companies making te largest year-on-year improvements compared to UK and Nort American peers. Wilst at a macro level cas oldings are at a record ig, not all companies are in tis position. Sustainably releasing cas from working capital can be a means to elp fund te future of businesses wit relatively low levels of cas and for tose looking to improve return on investment. Wit te average UK Return On Capital Employed dropping to 13.6% during, greater asset efficiency is likely to be one of te means of meeting investor expectation of better future returns. Te Q Deloitte 2013 Survey demonstrated tat 68% of respondents believe te operating cas flows of teir business will improve in te next 12 monts. Te likeliood is tat working capital optimisation will play a part in tat. Successful programmes can give sustainable access to funds to make more productive investments and meet investor expectations, as well as oter noncas benefits. In ligt of increasing pressure from sareolders and investors to grow returns, partly troug asset efficiency, one callenge will be to improve customer and supplier value generation wilst maintaining important relationsips. Working Capital 3

5 Heading Te level of excess working capital increased 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 4

6 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain Te level of excess working capital increased UK plc s working capital increased to 69 billion during. Tis is up from 64 billion in. UK plc: Working capital improvement opportunity bn Accounts Receivable Opportunity Accounts Payable 27.8 Opportunity Inventory 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source UK plc improves receivable management Companies are collecting payments from customers on average two days earlier tan in. Tis improvement as been partly driven by a focus on receivables management and is also a by-product of a trend in strengtened risk management, particularly wen dealing wit customers in new and emerging markets and tose Eurozone countries wit significant underlying economic issues. Sligt improvement in inventory management UK plc as delivered a 1% improvement in inventory management performance, wit a continued focus on supply cain and inventory efficiency. If economic forecasts are correct and UK business acieves growt in te sort-term, companies sould maintain inventory control to ensure tat demand forecasting and inventory planning are as accurate as possible to exploit new opportunities. Effective planning on volume, absolute value, product and materials mix and location to best exploit tose opportunities will elp avoid too muc cas tied up in inventory in te wrong locations. UK plc: Days Sales Outstanding (DSO) performance 2008 to Days UK Lower Quartile UK Average UK Upper Quartile UK plc: Days Inventory On-and (DIO) performance Days 60 UK Lower Quartile UK Average UK Upper Quartile Working Capital 5

7 11 Working Capital 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Sortening supplier payment period Te 2009 to trend of UK companies taking longer to pay suppliers as somewat reversed in wit te average period reducing by two days to 31. Even te best performing companies ave paid earlier, falling from 45 to 41 days. Te sortening of time taken to pay suppliers and te decline in accounts payable as peraps been driven by a mix of greater focus on supplier collaboration and a relaxing of a payables cas management approac. Going forward te European payment directive may ave an impact on payment beaviour (debtors liable for interest and reasonable recovery costs of te supplier if payment is not on time; 60 days for corporates and 30 days for public autorities). However, some companies will coose to protect relationsips in specific segments as opposed to carging interest across teir wole customer portfolio. Accounts payable cas opportunity remains Were companies delay payments, suppliers often seek to protect value troug oter variables suc as cost and a relaxing of service level agreements. Tis may ave contributed to te reduction in te average payment period as companies ave focussed more on non-cas value, owever te opportunity to drive greater value in accounts payable remains. Companies can drive sustainable benefit witout a detrimental impact on supplier value and relationsips troug focus on optimisation in specific supplier segments (e.g. non-strategic) and wit selected suppliers in oters (e.g. strategic, sensitive). UK plc: Days Payables Outstanding (DPO) performance 2007 to Days 50 UK Upper Quartile 40 UK Average UK Lower Quartile Working Capital 6

8 Heading UK sectors acieve a mixed performance 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 7

9 UK sectors acieve a mixed performance 2. Te level of excess working capital increased Materials and Media make gains but consumer debt contributes to poorer accounts receivable performance in Utilities and expansion reverses past improvements in Parma. 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain In investigating specific industries it is clear tat sector caracteristics can ave a significant impact on working capital performance. On average, UK companies ave decreased Days Sales Outstanding, a measure of customer payment performance, by two days since. However, underlying sector performance differs markedly, wit Materials companies dropping tis by four days and Media companies by six days. UK plc: Days Sales Outstanding (DSO) performance by sector Average days Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Utilities companies in te UK ave seen customer bad debt levels increase, wit te impact of iger utility bills and lower ouseold income weiging on consumers. Certainly tose companies wit iger proportions of consumer debt will ave experienced more difficulty in collecting cas from tis segment, wit iger bad debt write offs in. After a significant improvement in performance between 2008 and, were a number of major global parmaceutical companies used working capital optimisation to sustainably release cas from establised markets to elp fund acquisitions, overall performance in te sector deteriorated due to expansion in emerging or existing markets were longer payment terms and slower payment beaviour are more prominent Media Parma, biotec and life sciences UK average Energy Materials Telecommunication Services Utilities Working Capital 8

10 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Not all sectors improved management of inventory UK companies ave on average dropped inventory days olding by 1% since. However, Materials, Parmaceuticals, Retailing and Utilities sectors all remained similar to. Accounts payable performance declined in most sectors Accounts payable performance, from a working capital perspective, as deteriorated, wit Days Payable Outstanding down four days on average. More prevalent use of supply cain financing may ave ad a depressive impact on bot Days Sales Outstanding and Days Payable Outstanding witin te supply cain, wit tose taking advantage of tis metod of financing receiving cas from teir customers muc quicker (via te finance provider), altoug at a cost. Tose implementing supply cain financing are also paying accounts payable (to te finance provider) on time as opposed to aving payment run-led delays. Extending payment terms in tis situation would protect Days Payable Outstanding. Materials, Media and Retailing sectors followed te declining trend in. However, Parmaceutical companies balanced deterioration in accounts receivable performance wit an increase in supplier payment period. UK plc: Days Inventory (DIO) performance Average days Source: Deloitte analysis of publicly available information Media Materials Parma, biotecand life sciences Telecommunication UK plc: Days Payables Outstanding (DPO) performance by sector UK Average Average days Utilities Energy Retailing Media Materials Parma, biotec and life sciences Telecommunication Services UK average Utilities Energy Retailing Source: Deloitte analysis of publicly available information See Appendix 2 for UK plc most and least improved industry groupings - Working Capital 9

11 Heading Size matters in te supply cain 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 10

12 Size matters in te supply cain 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance Large companies appear to be using leverage over customers to greater effect by reducing cas tied up in accounts receivable. In comparison, smaller companies are typically managing inventories more carefully wilst starting to pay suppliers earlier tan in te prior year. 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas Mixed performance across UK segments For large companies, accounts payable performance was flat between and. Between 2010 and, small companies appeared to stretc payments to suppliers, bot from a payment and contractual term perspective, peraps due to pressure on cas flow. However, tese companies reduced te payment period by tree days between and to a level tat matced te performance of large companies. Mid-sized companies also dropped Days Payable Outstanding in te period to a level of approximately 30 days. UK: Average Days Payable Outstanding (DPO) by revenue segment Days 35 Less tan 300m More tan 1.5bn m to 1.5bn Source: Deloitte analysis of publicly available information 8. Excess working capital is te ceapest source Large company inventory performance declines Potentially due to smaller companies generally being more defensive and large companies taking greater inventory risk in anticipation of growt or switcing focus elsewere, small and mid-sized companies improved inventory performance between and, but large company performance deteriorated by 3%. UK: Average Days Inventory Outstanding (DIO) by revenue segment Days 35 More tan 1.5bn m to 1.5bn Less tan 300m Source: Deloitte analysis of publicly available information Working Capital 11

13 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas Smaller companies close te gap Larger companies appear to be using leverage over customers more effectively, demonstrated by te relative performance between revenue segments in accounts receivable performance, wit te period required to collect payments from customers inversely proportional to revenue segment size. Performance may also be impacted by some smaller companies using payment terms to win business. All revenue segments improved in, owever, small and mid-sized companies are closing te gap on large companies in accounts receivable performance. Average metric Revenue Segment ( ) DPO DIO DSO Less tan 300m m to 1.5bn More tan 1.5bn UK: Average Days Sales Outstanding (DSO) by revenue segment Days Less tan 300m m to 1.5bn 40 More tan 1.5bn Source: Deloitte analysis of publicly available information Movement Revenue Segment ( ) DPO DIO DSO Less tan 300m m to 1.5bn More tan 1.5bn Excess working capital is te ceapest source Average metric Revenue Segment ( ) DPO DIO DSO Less tan 300m m to 1.5bn More tan 1.5bn % Movement Revenue Segment ( ) DPO DIO DSO Less tan 300m -9% -1% -4% 300m to 1.5bn -8% -5% -8% More tan 1.5bn 0% 3% -4% Working Capital 12

14 Heading European companies make largest 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 13

15 21 Working Capital 2. Te level of excess working capital increased European companies make largest UK plc working capital performance deteriorated in wit a lengtening of te cas conversion cycle (Days Working Capital up 1%), yet European companies made te largest year-on-year improvements versus UK and Nort America. 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source A regional comparison Companies in te study ave global sales and procurement footprints and so local payment beaviours, typical industry and local payment terms, procurement approac and supply cain structures will impact overall working capital performance. However, at a regional level, were tere is a mix of company types and diverse business structures, te canges in working capital performance year-on-year in response to common external pressures is indicative of te way companies are approacing working capital management. UK and Europe make gains in accounts receivable Continued economic downturn in te euro region and underlying economic issues in certain member states ave continued to provide incentive to strengtening credit policies and influenced corporate sales strategies and tis is reflected in improved performance in te UK and Europe. UK plc vs. Europe & Nort America: Days Sales Outstanding (DSO) performance Days UK UK UK UK Europe Europe Europe Europe Nort America Top of bar is te Upper Quartile DPO (best performers), Lower Quartile DSO and DIO (worst performers). Bottom of te bar is te Lower Quartile DPO (worst performers), Upper Quartile DSO and DIO (best performers) Nort America Source: Deloitte analysis of publicly available information UK plc vs. Europe & Nort America: Days Payables Outstanding (DPO) performance Days Nort America Average regional metric Nort America Top of bar is te Upper Quartile DPO (best performers), Lower Quartile Average Working Capital 14 DSO and DIO (worst performers). Bottom of te bar is te Lower Quartile regional DPO (worst performers), Upper Quartile DSO and DIO (best performers) metric

16 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain Nort America maintains accounts payable performance, UK and European performance deteriorates Supplier payment periods in te Uk and Europe dropped by approximately two days between and, wit a decline in performance across te average and te best and worst performers from a working capital perspective, driven by increased supplier collaboration, strengtening of credit risk processes across te supply cain and potentially increased take-up of early payment discount options, typically more prevalent in Europe tan te UK. In te UK, te range between te worst and best performers tigtened in UK UK UK UK 31.3 Europe Europe Europe Nort America Top of bar is te Upper Quartile DPO (best performers), Lower Quartile DSO and DIO (worst performers). Bottom of te bar is te Lower Quartile DPO (worst performers), Upper Quartile DSO and DIO (best performers) Europe Nort America Top of bar is te Upper Quartile DPO (best performers), Lower Quartile UK DSO plc vs. and Europe DIO (worst & Nort performers). America: Bottom Days Inventory of te bar (DIO) is te performance Lower Quartile Days DPO (worst performers), Upper Quartile DSO and DIO (best performers) UK plc vs. Europe & Nort America: Days Payables Outstanding (DPO) performance Days Nort America Average regional metric Nort America Average regional metric 6. Not all companies are overflowing wit cas Excess working capital is te ceapest source UK and European companies improved inventory management wilst Nort American performance deteriorates On an average basis, UK and European companies improved performance by 1% and 3% respectively, wereas relative inventory olding in Nort American companies increased by 3%, driven by iger US confidence leading to building of relative inventory levels and peraps a relaxation of inventory controls in certain companies UK UK Europe Europe Top of bar is te Upper Quartile DPO (best performers), Lower Quartile DSO and DIO (worst performers). Bottom of te bar is te Lower Quartile DPO (worst performers), Upper Quartile DSO and DIO (best performers) Source: Deloitte analysis of publicly available information Nort Nort America America 31.9 Average regional metric Working Capital 15

17 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance Average DPO UK Europe N. America Movement Percentage movement -6% -4% 0% Average DIO UK Europe N. America Movement Percentage movement -1% -3% 3% 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas Average DSO UK Europe N. America Movement Percentage movement -3% -4% -1% Source: Deloitte analysis of publicly available information Average DWC UK Europe N. America Movement Percentage movement 1% -2% 1% 8. Excess working capital is te ceapest source Working Capital 16

18 Heading Not all companies are overflowing wit cas 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 17

19 25 Working Capital Not all companies are overflowing wit cas 2. Te level of excess working capital increased At a macro level cas oldings are at record igs, but it is te minority of companies tat are olding te majority of te cas. 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas Cas oldings concentrated in minority of corporates Assessing cas distribution on a pareto basis demonstrates tat te majority of cas is wit a minority of companies in all regions, wit almost alf of UK plc s total cas on te balance seets of 2% of te companies. A comparison of te companies olding te largest cas balances wit annual revenue demonstrates tat in te UK and Nort America, it is not te largest companies by revenue tat are necessarily olding te largest relative amounts of cas, wit te companies tat make up te top 80% of cas recording 68% of te revenue. Regional comparison of companies tat make up te top 80% of revenue UK Top 50 UK companies Europe: Top 200 companies Nort America Top 380 companies 100% 75% 89% 11% 50% 25% 0% 32% 21% 68% 79% Cas Revenue 100% 75% 25% 0% 25% 20% Cas Revenue 100% Source: Deloitte analysis of publicly available information. Te analysis above was produced on a pareto basis to assess te companies tat make up te top 80% of cumulative cas and cas equivalent oldings in eac region (UK, Europe and Nort America) to compare to te overall percentage of total sales tey acieved in te period. 75% 25% 0% 32% 20% 88% 12% 50% 75% 85% 15% 50% 80% 68% 80% Cas Revenue 8. Excess working capital is te ceapest source Relative oldings of cas vary by region and size of company Days Cas Outstanding (DCO) is a measure of cas relative to sales, calculated in order to give insigt into relative cas oldings on te balance seet between industries and regions. Tis is not one commonly used by corporates to manage cas and sould not be confused for a measure of net cas inflow and outflows, owever as a consistent and relative performance measure it elps to provide some interesting conclusions. Days of Sales in Cas & Cas Equivalents by revenue segment Days < 300m > 1.5bn m to 1.5bn Source: Deloitte analysis of publicly available data Working Capital 18

20 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source In te UK, small companies (revenue < 300m) old considerably iger relative cas levels, potentially due to defensive priorities or a need to be agile to exploit new market opportunities. Since 2010, companies in te UK, Europe and Nort America ave reduced relative cas and cas equivalent oldings. UK companies are olding te least relative cas oldings, wit Nort American peers being more defensive in teir approac. Nort American and European companies arguably reacted more defensively wit building of relative cas oldings between 2008 and 2009 during te global financial crisis, wereas UK companies grew relative cas oldings consistently, on a slower basis, until Macro level assessment masks micro level opportunity and need 33% of UK companies ave less tan two weeks of sales in cas and cas equivalents. A total of 14% of UK companies and 20% of Nort American companies ave less tan one week of sales in cas and cas equivalents. A total of 4% of UK companies and 8% of Nort American companies ave less tan two days sales in cas and cas equivalents. Te assessment of cas and cas equivalents terefore indicates tat tere are plenty of companies tat are not overflowing wit cas. Wen combined wit te assessment of excess working capital in all regions, tis indicates tat tere are many companies for wic cas is not so plentiful and sustainably releasing cas from working capital can be a means to elp fund te future of teir businesses. Days of Sales in Cas & Cas Equivalents: Regional Comparison Days 60 Nort America Europe UK Source: Deloitte analysis of publicly available data % of companies wit DCO <14 days Region % UK 33% Europe 24% Nort America 31% % of companies wit DCO <2 days Region % UK 4% Europe 3% Nort America 8% % of companies wit DCO <7 days Region % UK 14% Europe 12% Nort America 20% Working Capital 19

21 Heading Sareolder expectation and CFO risk 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 20

22 2. Te level of excess working capital increased Sareolder expectation and CFO risk Pressure is on to deliver iger return on capital investment as CFOs look to expansionary tactics yet during te average Return On Capital Employed dropped to 13.6%. 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas More UK companies improve Return On Capital Employed (ROCE) but average falls A total of 51% of UK companies sowed an improvement in ROCE between and, compared to 43% and 44% in Europe and Nort America respectively. However, despite a majority improving ROCE, average ROCE for te UK dropped from 14.1% to 13.6% in. ROCE performance varies by revenue segment By revenue segment, small (< 300m) and large (> 1.5bn) UK companies suffered a drop in ROCE between and, wereas mid-sized companies maintained performance after a year-on-year improvement since UK Average ROCE by revenue segment 20% 18% 16% 14% 12% 10% Source: Deloitte analysis of publicly available data 300m to 1.5bn > 1.5bn < 300m 8. Excess working capital is te ceapest source Working Capital 21

23 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain Increasing pressure on improving asset efficiency We are seeing greater empasis on asset efficiency in te market wit increasing pressure from sareolders and investors to make better use of assets to generate returns. Recent analysis as sown tat institutional investors are expecting far greater productive investment and a move away from defensive strategies. Companies in all regions are olding significant excess working capital wic is reducing te opportunity to generate sareolder value. Te Q Deloitte CFO survey indicates tat CFOs are also moving toward expansionary strategies and increasing appetite for risk wit a significant drop in defensive strategies. % of fund managers wo would like companies to increase capital expenditure, return cas to teir sareolders and repair balance seets 80% 70% 60% 50% 40% 30% 20% 10% 0% 11% 54% Increase capex 2009 September % 28% Return cas to sareolders 70% Source: Bank of America Merrill Lync, September fund managers survey, % Repair balance seet 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 22

24 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain Expectation and As sareolder expectation for optimisation of assets to generate value and CFO appetite for risk and expansion aligns, companies will expect to improve ROCE and asset efficiency. We believe tat sustainably releasing cas from working capital can be one of te foundations of tis improvement in return. CFO s perception of defensive and expansionary strategies 40% 38% 36% 34% 32% 30% 28% 26% 24% 22% 20% 10 Q3 10 Q4 11 Q1 11 Q2 11 Q3 11 Q4 Expansionary strategies Source: Deloitte Q CFO Survey. Aritmetic average of te % of CFOs wo rated expansionary and defensive strategies as a strong priority for teir businesses in te next 12 monts. Expansionary strategies are introducing new products/services or expanding into new markets, expanding by acquisition and increasing capital expenditure. Defensive strategies are reducing costs, reducing leverage and increasing cas flow. 12 Q1 12 Q2 Defensive strategies 12 Q3 12 Q4 13 Q1 13 Q2 13 Q3 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source % of CFOs wo tink it is a good time to take greater risk onto teir balance seets 60% 50% 40% 30% 20% 10% 0% 07 Q3 08 Q1 08 Q3 09 Q1 09 Q3 10 Q1 10 Q3 11 Q1 11 Q3 12 Q1 12 Q3 13 Q1 13 Q3 Source: Deloitte Q CFO Survey Working Capital 23

25 Heading Excess working capital is te ceapest source 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 24

26 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance Excess working capital is te ceapest source Cas conversion efficiency as declined for tree years in a row but 68% of UK CFOs believe teir operating cas flow will increase in te next 12 monts. % of CFOs wo rated eac of te following as a strong priority for teir businesses in te next 12 monts Introducing new products/ services or expanding into new markets Increasing cas flow 35% 38% 40% 40% 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas Te likeliood is tat working capital optimisation will play a part in tis improvement in cas flow. Successful programmes can give sustainable access to funds, wic can be used to make more productive investments. Tese in turn will elp to meet investor expectations as well as resulting in oter non-cas benefits. Reducing costs Expanding by acquisition Increasing capital expenditure Raising dividends or sare buybacks 15% 14% 11% 13% 20% 21% 29% 34% 8. Excess working capital is te ceapest source Reducing leverage Disposing of assets 9% 12% 9% 8% 2013 Q3 Q3 Source: Deloitte Q CFO Survey Working Capital 25

27 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance UK cas conversion efficiency as declined in te last tree years Cas conversion efficiency as declined in te UK to 11% but remains iger tan European peers and lower tan Nort American companies wo acieved an average of 14%. Reducing costs is still on te CFO agenda, wit gross profit margin reducing 1.5% yearon-year despite UK plc total revenue growing 1.3%. Average Cas Conversion Efficiency: Regional comparison 18% 16% 14% 12% 10% 8% Nort America UK Europe 6% 4. Size matters in te supply cain 4% Source: Deloitte analysis of publicly available data 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 26

28 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain UK small company cas conversion deteriorating UK small company (< 300m) cas conversion deteriorated at te largest rate of any of te regional revenue segments in, and it is arguably tis segment wo ave found credit more difficult to obtain and more expensive tan larger companies. Te Deloitte CFO survey demonstrated tat te cost of credit and availability is improving, but 11% of all segment CFOs are still saying tat credit is not available and 28% expect te cost of credit to increase in te next 12 monts. UK Average Cas Conversion Efficiency by revenue segment 16% 14% 12% 10% 8% 6% > 1.5bn 300m to 1.5bn < 300m Source: Deloitte analysis of publicly available data Net % of CFOs reporting credit is costly and credit is easily available 100% 100% 6. Not all companies are overflowing wit cas Credit is costly 80% 60% 40% 20% Cost of Credit (LHS) 80% 60% 40% 20% Credit is available 8. Excess working capital is te ceapest source Credit is ceap 0% -20% -40% -60% -80% Availability of credit (RHS) 0% -20% -40% -60% -80% Credit is ard to get -100% 08 Q3 08 Q1 08 Q3 09 Q1 09 Q3 10 Q1 10 Q3 11 Q1 11 Q3 12 Q1 12 Q3 13 Q1-100% 13 Q3 Source: Deloitte Q CFO Survey Working Capital 27

29 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas Excess working capital is te ceapest source of finance but successful optimisation programmes bring oter benefits Companies typically acieve a strong return from working capital improvement programmes from te sustainable release of cas to fund productive investments. Amongst te oter potential benefits are a reduction in funding cost, increased process efficiency and associated cost reduction and potentially a revenue benefit from improving administration and ease for customers to do business wit te improving company. Driving sustainable improvements Companies wo successfully and sustainably release cas from working capital are tose tat ensure buy-in and accountability across te business wit central and local senior management support. Companies must also combine effective performance visibility troug insigtful management information wit a deep understanding of te performance drivers to acieve improvements across te organisation. How muc can a company acieve? In our experience, successful organisations acieve sustainable working capital improvements of between 15% and 30% for eac of te elements of working capital optimised. As sareolder expectation increases, many CFOs will need or want to focus on tapping into teir sare of te 69 billion UK excess working capital to fund corporate strategies. 8. Excess working capital is te ceapest source In our experience, successful organisations acieve sustainable working capital improvements of between 15% and 30% for eac of te elements of working capital optimised. Working Capital 28

30 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 29

31 Appendix 1: Working capital performance overview regional working capital performance metrics UK revenue segment working capital performance metrics 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas Average Performance Upper Quartile Performance Lower Quartile Performance UK Nort America Europe Days Working Capital Days Sales Outstanding Days Payables Outstanding Days Inventory On and Wo's Funding Wo (days) Days Working Capital Days Sales Outstanding Days Payables Outstanding Days Inventory On and Wo's Funding Wo (days) Days Working Capital Days Sales Outstanding Days Payables Outstanding Days Inventory On and Wo s Funding Wo (days) Average Performance Upper Quartile Performance Lower Quartile Performance Less tan 300m revenue UK 300m to 1.5bn revenue More tan 1.5bn revenue Days Working Capital Days Sales Outstanding Days Payables Outstanding Days Inventory On and Wo's Funding Wo (days) Days Working Capital Days Sales Outstanding Days Payables Outstanding Days Inventory On and Wo's Funding Wo (days) Days Working Capital Days Sales Outstanding Days Payables Outstanding Excess working capital is te ceapest source Source: Deloitte analysis of publicly available information Days Inventory On and Wo's Funding Wo (days) Source: Deloitte analysis of publicly available information Working Capital 30

32 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance Appendix 2: UK plc most and least improved industry groupings - UK plc most improved industry groupings - 5 Most improved by DWC % Cange Industry sub-group DSO 1 DIO 2 DPO 3 DWC 4 DSO DIO DPO DWC DSO DIO DPO DWC IT Services % 46% 13% 51% Food Products % 20% 6% 24% Oil, Gas and Consumable Fuels % 18% 8% 20% 4. Size matters in te supply cain Trading Companies and Distributors % 3% 18% 16% Commercial Services and Supplies % 8% 7% 14% Source: Deloitte analysis of publicly available information UK plc most improved industry groupings Not all companies are overflowing wit cas Least improved by DWC % Cange 8. Excess working capital is te ceapest source Industry sub-group DSO 1 DIO 2 DPO 3 DWC 4 DSO DIO DPO DWC DSO DIO DPO DWC Airlines % 1% 11% 55% Energy Equipment and Services % 25% 31% 21% Specialty Retail % 3% 1% 9% Macinery % 2% 5% 9% Construction and Engineering % 28% 2% 8% Note: Red represents a negative working capital impact, green a positive working capital impact. Metrics are averages; ence rows do not cast. 1. DSO Days Sales Outstanding 2. Days Inventory 3. Days Payable Outstanding 4. Days Working Capital 5. Industry Groupings are detailed in Appendix 4 Source: Deloitte analysis of publicly available information Working Capital 31

33 Appendix 3: Oter metric performance overview Average Cas Conversion Efficiency 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance UK Europe Nort America Revenue segment < 300m 10.2% 10.1% 11.8% 11.3% 10.0% 8.3% 9.4% 8.0% 7.9% 8.3% 13.7% 13.1% 14.6% 14.1% 13.8% 300m to 1.5bn 10.5% 12.0% 12.5% 12.0% 11.6% 10.7% 13.1% 11.3% 10.6% 10.3% 12.8% 14.9% 14.3% 13.4% 13.4% > 1.5bn 11.5% 13.3% 13.6% 11.9% 11.8% 9.6% 12.2% 11.2% 10.0% 9.9% 12.4% 14.4% 14.0% 13.3% 13.5% 4. Size matters in te supply cain Average 10.7% 11.6% 12.5% 11.7% 11.0% 9.5% 11.5% 10.0% 9.5% 9.4% 12.9% 14.2% 14.3% 13.6% 13.6% Source: Deloitte analysis of publicly available information Average ROCE UK 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Revenue segment < 300m 14.1% 11.3% 13.2% 12.2% 11.9% 300m to 1.5bn 16.4% 14.3% 15.5% 15.9% 15.9% > 1.5bn 15.6% 13.5% 14.1% 14.4% 13.6% Average 15.3% 13.0% 14.2% 14.1% 13.6% Source: Deloitte analysis of publicly available information Average Gross Profit Margin UK Europe Nort America Revenue segment < 300m 38.2% 36.9% 38.3% 38.4% 37.3% 38.1% 37.3% 37.9% 38.1% 38.0% 40.2% 40.5% 41.6% 42.6% 42.0% 300m to 1.5bn 34.6% 34.3% 35.9% 36.0% 35.8% 37.5% 37.1% 38.5% 37.6% 37.6% 36.1% 35.8% 37.3% 37.5% 37.2% > 1.5bn 30.9% 31.4% 32.6% 33.1% 32.7% 33.7% 33.2% 34.0% 33.3% 32.9% 32.7% 32.8% 33.8% 33.6% 33.6% Average 34.9% 34.5% 36.0% 36.1% 35.6% 36.6% 36.0% 37.0% 36.4% 36.5% 36.1% 36.1% 37.5% 38.0% 37.7% Source: Deloitte analysis of publicly available information Working Capital 32

34 Average Days Sales in Cas (DCO) 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance UK Europe Nort America Revenue segment < 300m m to 1.5bn > 1.5bn Size matters in te supply cain Average Source: Deloitte analysis of publicly available information 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Working Capital 33

35 Appendix 4: Metodology 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Te Deloitte working capital study provides a view of working capital performance of UK listed companies wit turnover greater tan 60m. Tis is in relation to teir Nort American and European listed peer groups. Te Financial Services and Insurance sectors are excluded. Te analysis is based on data extracted from Capital IQ for te past five years (latest available accounts plus preceding four years): Net Sales. Trade accounts receivable. Trade accounts payable. Inventory. Cas & cas equivalents (does not include sort-term investments or marketable securities). Net Capital Employed (Total assets less current liabilities). Operating cas flow. Gross profit. Earnings Before Interest and Taxation (EBIT). Country. Industry Sector. Industry Group. Industry Sub-Group. Te following ratios were calculated on te data, as defined below: Days Sales Outstanding (DSO) = Trade Receivables/ (Net Sales/365) Days Payables Outstanding (DPO) = Trade Payables/ (Net Sales/365) Days Inventory (DIO) = Inventory/(Net Sales/365) Wo s Funding Wo (WFW) = DSO DPO Days Working Capital (DWC) = DSO + DIO DPO Net Working Capital as a % of Sales = (Trade accounts receivable + Inventory Trade accounts payable)/net Sales) Return on Capital Employed (ROCE) = Earnings Before Interest and Taxation/Net Capital Employed Cas Conversion Efficiency (CCE) = Cas generated from Operations/Net Sales Gross Profit Margin (GPM) = Gross Profit/Net Sales Days Cas (DCO) = Cas and Cas Equivalents/(Net Sales/365) Te days based calculation of te elements of working capital takes net sales as te denominator. Tis consistency of calculation enables addition of te individual elements to give Days Working Capital and Wo s Funding Wo figures. Wo s Funding Wo is a measure to wat extent a company is effectively funding te supply cain. Working Capital 34

36 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas In assessing average Days Inventory performance of a segment, country or region, ouse builder inventory as been excluded to avoid tis group skewing te underlying performance levels troug significant land bank oldings. Te Days Cas measure is a measure of cas relative to sales calculated in order to give insigt into relative cas oldings on te balance seet between industries and regions. It is not a measure of te balance between cas inflows and outflows. In order to assess weter size of company as an impact on working capital performance, we split UK plc into tree annual revenue segments to obtain rougly 1/3 of all companies in eac; < 300m, 300m to 1.5bn and > 1.5bn. Calculation opportunity/excess Working Capital Deloitte calculates te level of opportunity for releasing cas from working capital on te assumption tat te top quartile of companies (te best performers ) witin a peer group ave acieved relative success in managing working capital, and ave accordingly set a bencmark for oters to follow. It ten moves all UK listed companies, on a sector basis, towards te performance level of tese best companies, wilst making allowance in te calculation for te relative difficulty of te task of acieving tis standard, ence calculating a number tat is realisable rater tan based on aspiration. 8. Excess working capital is te ceapest source Working Capital 35

37 Appendix 5: Industry Groupings Te following industry groupings were used in compiling te Deloitte Working Capital Performance Study: 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Capital IQ Industry Classification Industry Sector Industry Group Industry Sub-group Consumer Discretionary Consumer Staples Automobiles and Components Consumer Durables and Apparel Consumer Services Media Retailing Food and Staples Retailing Food, Beverage and Tobacco Houseold and Personal Products Auto Components Automobiles Houseold Durables Leisure Equipment and Products Textiles, Apparel and Luxury Goods Diversified Consumer Services Hotels, Restaurants and Leisure Media Distributors Internet and Catalog Retail Multiline Retail Specialty Retail Food and Staples Retailing Beverages Food Products Tobacco Houseold Products Personal Products Energy Energy Energy Equipment and Services Oil, Gas and Consumable Fuels Healtcare Healtcare Equipment and Services Parmaceuticals, Biotecnology and Life Sciences Healt Care Tecnology Healtcare Equipment and Supplies Healtcare Providers and Services Biotecnology Life Sciences Tools and Services Parmaceuticals Working Capital 36

38 Capital IQ Industry Classification continued 2. Te level of excess working capital increased 3. UK sectors acieve a mixed performance 4. Size matters in te supply cain 6. Not all companies are overflowing wit cas 8. Excess working capital is te ceapest source Industry Sector Industry Group Industry Sub-group Industrials Information Tecnology Capital Goods Commercial and Professional Services Transportation Semiconductors and Semiconductor Equipment Software and Services Tecnology Hardware and Equipment Aerospace and Defence Building Products Construction and Engineering Electrical Equipment Industrial Conglomerates Macinery Trading Companies and Distributors Commercial Services and Supplies Professional Services Air Freigt and Logistics Airlines Marine Road and Rail Transportation Infrastructure Semiconductors and Semiconductor Equipment Internet Software and Services IT Services Software Communications Equipment Computers and Periperals Electronic Equipment, Instruments and Components Office Electronics Materials Materials Cemicals Construction Materials Containers and Packaging Metals and Mining Paper and Forest Products Telecommunication Services Telecommunication Services Diversified Telecommunication Services Wireless Telecommunication Services Utilities Utilities Electric Utilities Gas Utilities Independent Power Producers and Energy Traders Multi-Utilities Water Utilities Working Capital 37

39 Back cover 14 Contacts Andrew Harris Partner +44 (0) Stepen Guerin Senior Manager +44 (0) David Lock Senior Manager +44 (0) Deloitte refers to one or more of Deloitte Touce Tomatsu Limited ( DTTL ), a UK private company limited by guarantee, and its network of member firms, eac of wic is a legally separate and independent entity. Please see for a detailed description of te legal structure of DTTL and its member firms. Deloitte LLP is te United Kingdom member firm of DTTL. Tis publication as been written in general terms and terefore cannot be relied on to cover specific situations; application of te principles set out will depend upon te particular circumstances involved and we recommend tat you obtain professional advice before acting or refraining from acting on any of te contents of tis publication. Deloitte LLP would be pleased to advise readers on ow to apply te principles set out in tis publication to teir specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in tis publication Deloitte LLP. All rigts reserved. Deloitte LLP is a limited liability partnersip registered in England and Wales wit registered number OC and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) Fax: +44 (0) Designed and produced by Te Creative Studio at Deloitte, London A 19