The more efficient businesses are at managing working capital, the less cash is tied up in running the business on a day-to-day basis. Many companies have not had to address this issue in recent years as interest rates have been fairly low and it has been easy to plough cash into working capital.

With interest rates at a six-year high, the cost of funding working capital has risen sharply. Rate rises over the past 12 months mean that the funding costs associated with working capital are estimated to have increased by more than £1 billion for the UK’s top 100 businesses alone.

Any slowdown in the economy is likely to see customers taking longer to pay and this, combined with the need to generate more cash to meet the interest payments on debt, throws the spotlight on good working capital management.

Andrew Harris, Associate Partner at Deloitte, said: “One of the first questions that CFOs ask us is - what is the right level of working capital for my business. The answer is complex as the level of working capital is a reflection of the company’s strategy as well as the operational efficiency of the business.

“They are right to be concerned, after all more working capital means less cash. Not only does the increase in interest rates mean that funding working capital is costing more, but many CFOs feel powerless to bring down the level of working capital.”

Harris, continued: “Cash businesses, like retail and travel, have low working capital and therefore are less likely to review their working capital. Manufacturing, publishing and food processing however tend to be working capital intensive and therefore the impact will be much higher.”

While saying that there is no silver bullet, Deloitte, the business advisory firm advises the following for companies to optimise their working capital:

* Implement robust cash flow forecasting to maximise control and transparency and to drive working capital improvement.
* Manage working capital on a day-to-day basis and not just at year end.
* Involve people from operations and sales not just finance in driving through working capital improvements.
* Understand how your suppliers and customers work so that issues can be resolved quickly.
* Lead by example. The importance of cash and working capital should come from the top of the organisation.