Billions of euros, both working capital and liquid assets, are inefficiently tied up in private sector businesses at the very time when the credit crunch is starting to bite in the “real” economy, according to a new report, Putting Capital to Work, produced by Siemens Financial Services (SFS).
In the main European economies and the US, €409bn ($648.1.bn) is being spent on the purchase of business equipment, instead of acquiring that equipment through a financing plan that would free up working capital for investment in growth strategies.
A further €386bn lies frozen in late invoice payments, indicating that businesses have two substantial sources of inefficiently deployed working capital and liquid assets that could be freed up via alternative financing techniques.
In the five main European economies (Germany, the UK, Italy, France and Spain), more than €250bn lay “frozen” in 2007 because plant, vehicles, and all other types of business equipment is bought outright by private sector businesses, rather than acquired using best practice financing techniques. This is accompanied by a further €215bn of cash trapped in late invoice payment.
The SFS report also calculates the “frozen capital” figures as a proportion of gross domestic product (GDP), revealing that private businesses in the US are among the most efficient deployers of working capital, with frozen capital trapped in equipment purchases and late invoice payment representing only about 2.6% of GDP; compared to about 5.8% of GDP in the main European economies.
