Businesses in the North have an estimated £59.6 billion tied up in excess working capital
Firms across the region have seen a rapid increase in the their working capital
Economic uncertainty and revenue growth is putting North West businesses under historic pressure to increase their working capital
But this could leave businesses exposed if economic conditions began to deteriorate
Companies across the North have at least £59.6 billion tied up in excess working capital as business growth continues to soar, according to new figures from Lloyds Bank Commercial Banking.
But local firms could be storing up trouble by building up their stock levels ahead of anticipated price hikes, causing the levels of cash trapped in working capital to increase, Lloyds Bank’s research found.
Working capital is the amount of money that a company needs to cover the day-to-day costs of running the business. The more money tied up in working capital, the less available for investment or reducing debt.
By tying up more cash in working capital, particularly stock, North West businesses could be missing out on a “cash mountain” and could be left exposed if economic conditions deteriorate and they are left holding too much stock.
The Lloyds Bank Working Capital Index is a new six-monthly index launched today that uses the Lloyds Bank Regional Purchasing Managers’ Index (PMI) data to calculate the pressure businesses are under to either increase or decrease working capital.
A reading of more than 100 indicates pressure to devote more cash to working capital while a reading of less than 100 indicates pressure to prioritise liquidity.
The current reading of 105.9 indicates that North West firms are putting more cash into their working capital, even though economic indicators warn of possible storms to come.
Caroline Cuthbertson, Lloyds Bank Global Transaction Banking in the North West, said: “Working capital is the lifeblood of any business, and our research shows that British businesses have huge amounts of money tied up in it. This cash mountain suggests that companies are either feeling more positive about the future or that they are reducing their focus on this critical area of business performance.
“This could be a good sign: businesses can afford to stock up and tie up increasing levels of cash in working capital when they are performing well and focussed on growing their business. But, having those funds locked away at times of uncertainty, or if the economy falters, could spell danger.
“By understanding the hurdles they face and how their working capital levels compare with industry norms, British businesses can use this insight to unlock the cash trapped within their business, become more efficient and realise their full potential.”
Chris Williamson, chief business economist at IHS Markit added: “It is worrying that firms are under such high pressure to increase working capital at a time when other economic indicators suggest the economy is starting to slow.
“Looking back over the past 17 years, this index shows that when times get tough, companies normally look to decrease working capital to free up cash.
“What we’re seeing now is evidence of the corporate sector starting to struggle with customer payment delays and rising costs, while also building a war chest to get through a period of potential uncertainty and volatile business conditions.”
UK Regions Working Capital Index
Glenn Bemment, Regional Director for Lloyds Bank Mid Markets in the North West added: “Our teams of dedicated working capital specialists can help firms of all sizes to explore their working capital cycle and unlock the cash within their business so that they can invest in growth.
“With continued pressure on cash cycles, a build-up of excess working capital and mixed economic signals for 2017, now is the time for British companies to renew focus on working capital.”
For more information about the Lloyds Bank Working Capital Index visit http://resources.lloydsbank.com/insight/working-capital-management/