Chapter 13 • Management of working capital
Table 13.1Summarised balance sheets of five UK businesses
Associated British JD Wetherspoon Balfour Tesco plc Rolls-Royce plc
Foods plc plc Beatty plcBalance sheet date 15.9.2007 29.7.2007 31.12.2006 24.2.2007 31.12.2006
%%%%%
Non-current assets 85 111 133 124 57
Current assets
Inventories 16 3 8 12 23
Trade receivables 11 – 49 – 27
Other receivables 7 1 41 7 23
Cash and near cash 7 3 33 6 34
41 7 131 25 107
Total assets 126 118 264 149 164Total equity and
non-current liabilities 100 100 100 100 100
Current liabilities
Trade payables 9 8 54 20 10
Taxation 2 1 3 3 3
Other payables 13 9 105 16 44
Overdrafts and other
short-term borrowings 2 – 2 10 7
26 18 164 49 64
Total equity and liabilities 126 118 264 149 164Notes: The non-current assets, current assets and current liabilities are expressed as a percentage of the total long-term financing (equity plus
non-current liabilities) of the business concerned. The businesses were randomly selected, except that they were deliberately taken from
different industries. Associated British Foods produces food (e.g. Ovaltine and Ryvita) and retails (through Primark). Wetherspoon operates a
chain of pubs. Balfour Beatty is a building and civil engineering business. Tesco is a food supermarket chain. Rolls-Royce makes engines and
pumps, notably for use in the aerospace industry.
The other striking feature of Table 13.1 is the variation from one type of business
to the next. Consider inventories, for example. Associated British Foods plc (ABF) is
a manufacturer and retailer. To be able to offer its retail customers choice, the business
has to hold fairly high levels of inventories. Balfour Beatty plctends to hold fairly
large inventories because it has a lot of work in progress. Compared with its overall
operations, J D Wetherspoon plc’s inventories are small, partly because its inventories
are perishable and partly because its business model is to save costs by moving13.3 The importance of the management of working capital
The scale of working capital
It is tempting to believe that with working capital we are dealing with relatively
trivial amounts. Such a view is very wide of the mark for the typical UK business; the
amounts involved tend to be vast.
Table 13.1 gives some idea of the scale of working capital. The figures for inventor-
ies, trade receivables and cash are typically large when looked at alongside the total
investment, at book values, in non-current assets. This is, of course, offset to some
extent by ‘free’ finance supplied by trade payables and others.