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Businesses must start to put excess capital back into the economy

It seems that after a decade of spending, businesses have actually got into the habit of austerity and of saving – but perhaps a little too zealously. The latest study of working capital practices by REL, who exclusively provided us with their data, reveals that there is excess capital of €742bn held on the balance sheets of Europe’s largest 933 companies by revenue. (REL calculates this by comparing a company’s working capital performance to that of the upper quartile performance of the same industrial sector). That is almost exactly the amount that 16 eurozone finance ministers set aside in May for the possibility of a collapse of the euro currency.

“The 2010 number represents 33 percent of the gross working capital figure for all companies within the survey – a number that has not moved significantly in recent years whatever the macroeconomic conditions,” Gavin Swindell, managing director for Europe at REL tells Financial Director.

Spongy bit
As the cheapest way of financing growth, carrying no rates or terms, this capital is ripe for release. But the term “excess” belies the importance of the challenge in unlocking it: perhaps it should be thought of as a capital spare tyre. Companies sporting this extra spongy bit around their middle must recognise that by using the cash smartly, they can take advantage of market opportunities while their rivals struggle amid the economic downturn. As the threat of sovereign downgrade and record levels of unemployment hangs over increasing numbers of European countries, this is even more urgent.

And as the UK looks for ways to clamber out of recession, the response its companies make to this challenge is just as important. The 242 largest businesses in the UK by revenue are holding onto €121bn in excess capital, REL finds.

Financial Director pointed out in its May issue cover story that the manufacturing sector is rebounding surprisingly well after years in the doldrums, and is increasingly looked on as one of the potential saviours of the economy. But for this to happen, investment in areas such as research and development must be bold, swift and sustained. Excess capital is there for the using.

Given the scale of economic uncertainty hanging over both the UK and Europe, it is worth reading over the figures in our downloadable report and considering if your business is hoarding cash when it could be putting it to work.

“Even considering the recession-fuelled difficulties businesses are experiencing in raising external finance, the figures remain shockingly large,” says REL’s Swindell. “We estimate that eliminating this excess could improve EBIT numbers by as much as 10 percent.”

Download our full report in PDF format

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