British businesses sitting on £600bn that could be used to fund growth

Ed Thurman

The Lloyds Bank Working Capital Index combines the bank’s proprietary research and IHS Markit’s UK Purchasing Managers’ Index (PMI) data to calculate the working capital pressures businesses are under.

Analysis of nearly 9,000 firms revealed a total of £142 billion is tied up in working capital, a £15 billion rise on last year and a £41 billion hike on 2015. When compared against historical and industry best levels of cash flow efficiency, and extrapolated across UK businesses with more than 50 employees, this equates to £593 billion of excess working capital.

Working capital, the amount of money that a company has committed to the day-to-day costs of doing business, includes overheads such as stock and unpaid invoices.

Today’s figures indicate stockpiling is the biggest contributor to the increased amount of cash tied-up in working capital. The data shows business inventory levels have risen every year since 2015, with firms investing more than £8 billion this way in the last 12 months alone.

Stockpiling has led larger firms to increase inventory by 33 per cent on average in the last three years. Aerospace and defence, industrial manufacturing and pharmaceuticals were among the sectors experiencing the fastest inventory growth.

The trend for stockpiling pressurises firms’ cash flow, potentially leaving them unable to access the funds needed to manage unforeseen opportunities or challenges.

Looking ahead, more than a third of firms (35 per cent) said business and political uncertainty was the biggest concern affecting the way they plan to manage working capital in the year ahead. This was followed by changes to payment terms (16 per cent) and stockpiling (15 per cent), although this was heavily weighted to manufacturers.

With unpaid bills also weighing on businesses minds, data from the Lloyds Bank Commercial Banking Business Barometer found that 65 per cent are taking proactive steps to collect overdue invoices1. According to the Working Capital Index, small firms typically have cash conversion cycles which are seven days longer than those of larger firms2.

Ed Thurman, managing director of Global Transaction Banking at Lloyds Bank, said: “While businesses tying up significant amounts of cash can be an indicator of confidence, against a backdrop of uneven growth figures across core sectors, we shouldn’t be complacent.

“Our research confirms businesses are stockpiling as a precautionary measure, in the face of political and economic uncertainty, to ensure they are in a strong position to face into any potential challenges. Such a deliberate response to an ongoing situation can be risky as cash invested in inventory is rarely easy to release meaning firms are less able to invest in growth or respond to unexpected changes in demand.”

The PMI data used as an early warning indicator in the Working Capital Index unveils overall pressure to increase working capital has remained relatively flat year-on-year, with a current UK reading of 104.9 (vs 104.6 in 2018)3.

Meanwhile, the reading for the manufacturing sector is at an all-time high of 130.7 (vs 111.0 in 2018)4. The UK’s services and construction sectors measured readings of 99.8 and 107.7 respectively5.

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.

Lloyds Bank’s Index found that nearly a third (29 per cent) of manufacturers cited stock build-up as their primary working capital concern, with businesses currently holding elevated stock levels which they plan to run down in the year ahead.

Firms in the East of England have the greatest relative opportunity to free up cash with nearly 11 per cent of total revenue currently tied up in working capital, having seen a 47 per cent jump in inventory levels since 2015.

Those in London have the smallest relative opportunity (just over 5 per cent of revenue), likely due to its weighting to the service sector, although even in London inventory levels grew 23 per cent since 2015.