Cash reserves have ballooned over the last five years, but companies are not doing enough with their funds to drive the growth of the economy, a report has revealed.
Cash on hand is up by 5 per cent in the last year alone, and up 15 per cent from five years ago, but the majority of this capital sits in the bank accounts of a relatively small number of companies.
Of the 2,929 public and private UK companies studied, 10 held over 30 per cent of the entire study group’s combined £244 billion in wealth.
The report refers to this as the “cash conundrum”. Corporates are holding wealth because of the significant uncertainty and volatility in the financial markets since the global financial crisis began in 2007. As a result, big businesses are storing huge cash reserves to act as a “buffer” against a potential crisis.
There is no “easy fix” to this problem, the researchers said, but “releasing some of this cash to support the requirements of fast-growth, dynamic businesses has the potential to super-charge UK economic growth”.
The study found that when smaller companies sustainably unlock cash from operations, they far outperform their peers.
These companies significantly improved in trading terms, boosting their revenue growth by 3 per cent in comparison to the UK’s one per cent average.
Their Earnings Before Interest and Taxes (EBIT) margin grew too, up 11 per cent compared to the rest of the group’s -2 two per cent.
In the short term, the report said, corporates should focus on releasing some of the £135 billion excess cash tied up in working capital across UK businesses.
