What does Brexit mean for your working capital?

by Daniel Windaus Partner

Email +44 (0)7725 633420


As the UK moves through an unprecedented era of change and uncertainty, managing cash and liquidity is more important than ever. Abnormal cash-flow patterns to manage pre- and post- Brexit disruption means companies need to take extra care to avoid knock-on issues, such as disruptions to the everyday running of the business, or breaching short-term financing arrangements. However, our latest research shows a worrying trend in the UK’s performance on working capital that organisations will need to address to deal with the potential impact of Brexit.

UK working capital levels are deteriorating

Historically, companies in the UK have been more cash focused than their counterparts in continental Europe. While the latest research reveals that they continue to show more efficient (i.e. lower) levels of Working Capital, comparing listed businesses in the UK with those in the remaining EU27 paints a worrying picture.

While Days Working Capital (the ratio of net operating capital versus sales) has been relatively flat in the EU27, it has deteriorated (increased) at a rate of 6% per year over the last five years in the UK. And while the EU has seen Days Working Capital decrease at an average rate of 2% per year since 2016 the UK has seen a rise of 4% per year.

Days working capital change

This trend continues when looking at all individual elements of working capital. Receivables days has grown twice as fast in the UK than the EU27, while inventory days has deteriorated faster in the UK.

As a result of these trends, the EU27 have now caught up with the UK in terms of their Operational Cash flow performance. Since 2016, operational cash flow as a percentage of revenue has deteriorated by 2% per year in the UK. CAPEX has also deteriorated in the UK, by 5% per year since 2016 and is now at its lowest level for the last five years. With the UK losing its historical edge, and a lack of investment potentially undermining future performance further, keeping control of Working Capital is critical.

Investment ratio

Which industries are most impacted?

In most industries, the UK is still outperforming the EU27 when it comes to working capital. However, some industries have seen a deterioration in their performance:

  • Six of the largest 10 sectors in terms of revenue in the UK have seen working capital deterioration
  • The largest relative deterioration has happened in Metals & Mining, Hospitality, Retail and Automotive
  • Retail and Automotive also stand out with showing lower working capital performance as well as a more significant deterioration in performance in the UK versus Europe.

Some of these industries are also particularly exposed to the impacts of Brexit. For example, Automotive is already under pressure with just in time supply chains which have been pushed to the edge due to both production stops during March, as well as international Original Equipment Manufacturers (OEMs) re-evaluating their operations in the UK.

A 31 October Brexit date will also come at a difficult time for retailers, as it coincides with the ramping up of inventories ahead of Christmas trading. Retailers who further increase inventories to buffer the potential disruptions of Brexit will see a hike in their working capital, as well as having the challenge of finding physical space to store additional inventory.

NWC days table

Preparing for Brexit

The impact of Brexit is not yet clearly visible in the data, with stockpiling for the potential March 2019 exit unwound. However, the reality of the withdrawal from the European Union is that it will most likely lead to a raising of trade barriers with the UK’s largest market. This in turn will have an impact on lead times and the length of supply chains that, together with higher uncertainty, will result in higher inventory levels for UK firms.

Key things for business to do now include:

  • Review lead times, safety and cycle stock to proactively manage inventory. This means engaging with your suppliers early and evaluating the needs for physical space, including warehousing, ahead of key trading times.
  • Engage suppliers, customers and other key organisations to share assumptions, and re-evaluate who will bare the impact of working capital changes. Evaluate contracts and where these need to be renegotiated to align to reflect changed commercial realities.
  • Model the potential changes in working capital requirements in a post Brexit scenario, including the impact of trade barriers and potential currency fluctuations, to ensure headroom in financing is available.

While overall most sectors are still more capital efficient than their EU counterparts with regards to Working Capital, current trends and future headwinds mean that businesses need to refocus on optimising working capital now.

by Daniel Windaus Partner

Email +44 (0)7725 633420