Businesses in London now have £235.2bn tied up in excess working capital
Sustained economic growth and the fall in the Sterling exchange rate have put record pressure on businesses in London to increase the amount of money tied up in working capital, leaving them at risk if growth were to weaken in the months ahead, according to a new report from Lloyds Bank Commercial Banking.
Firms across London now have around £235.2bn tied up in excess working capital – up seven per cent from £219.5bn since the last report was released in May – meaning that firms could struggle to free up cash either to grow or to weather turbulent financial conditions.
The sustained growth seen nationally in the past 12 months – particularly in manufacturing and in the services sector – has increased the amount of cash tied up in the day-to-day running of businesses, with the impacts from the fall in Sterling, forward purchasing of inventory and a rise in input costs being fully realised.
Stephen Hand, area director for Lloyds Bank Global Transaction Banking in London and the South East, said: “The working capital index for London has risen above 100 since April, suggesting that businesses are now under pressure to increase the amount of cash available for working capital.
“While the figure remains the lowest of any region in the UK, that is because the capital’s economy is unlike any other in the UK, dominated as it is by large businesses with sophisticated treasury teams with experience at managing working capital closely. The fact that pressure on working capital is rising despite this could be a concern.
“By locking up cash in this way, it stops investment in other more productive areas of the business, whether that be investing in new people, creating new products or targeting new markets.
“With as many as one in three businesses nationwide telling us that their greatest concerns for the next 12 months are economic uncertainty or a fall in sales, this reliance on future growth prospects is concerning.
“Ultimately, every pound tied up in working capital is a pound that could be invested in other, more productive areas of a business and this is something that businesses in Wales should be managing closely.”