Billions of inefficiently deployed capital in the private sector revealed by new report from Siemens Financial Services
Vast opportunity to improve efficiency of business investment in the credit crunch
Siemens Financial Services (SFS), the international provider of business finance solutions, has today published new research revealing that 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. SFS’ report, Putting Capital to Work, shows that in the main European economies and the United States, €409bn 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 through alternative financing techniques.
In the five main European economies (Germany, UK, Italy, France and Spain), over a quarter of a trillion Euros (€256bn) 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. SFS’ report also calculates the ‘frozen capital’ figures as a proportion of GDP, revealing that private businesses in the US are amongst the most efficient deployers of working capital, with frozen capital trapped in equipment purchases and late invoice payment representing only around 2.6% of GDP; compared with around 5.8% of GDP in the main European economies.
Jonathan Andrew, Head of Commercial Financing, Siemens Financial Services (Europe and Asia Pacific), comments, “In economic terms, the current environment may be regarded as a much needed return to a more equitable correlation between borrower risk and lending rates. As a result, companies are having to look for alternative sources of finance to replace the tightening availability of credit, and to free up ‘frozen’ working capital for more efficient and effective deployment.
Asset finance, in the form of leasing and rental arrangements, is particularly attractive in the current climate, as the financing package can be secured against the equipment asset, rather wholly depending on the obligor organisation’s credit status. Receivables financing is the second key financing tool which can be employed by business and industry in Europe and the US to improve cash flow and working capital availability.”
Even though the study eliminated the effect of inflation and other factors when calculating frozen capital, all countries studied showed a steady rise in working capital tied up in this way between 2005 and 2007. The UK shows a relatively lower level of ‘frozen capital’ because of a comparatively high usage of asset finance. Spain is lowest in absolute terms – but mainly because of the smaller size of the Spanish economy. Across all geographies studies, the clear message emerges that financial directors need to explore with some urgency their ability to utilize alternative financing techniques in order to keep their firms competitive during a slow economic period.
Calculating Frozen Capital
* The formula for calculating frozen capital is as follows:
* Annual spending on business equipment is reduced to the proportion deemed leasable
* This remaining sum is then reduced by the all-sectors leasing penetration rate for the country in question
* The remaining sum is regarded as largely frozen in that it has been locked in for outright purchases where payments could have been spread – such as monthly payments – across the lifetime of the asset
Siemens Financial Services (SFS) is an international provider of financial solutions in the business-to-business area. With about 1,900 employees and an international network of financial companies coordinated by Siemens Financial Services GmbH, Munich, we support Siemens as well as non-affiliated companies, focusing on the three sectors of energy, industry and healthcare. We finance infrastructure, equipment and working capital and act as a competent manager of financial risks within Siemens. By leveraging our financing expertise and our industrial know-how we create value for our customers and help them strengthen their competitiveness. For more information see: www.siemens.com/finance.
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Reference Number: SFS 2008.3e
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