London’s firms missing out on 'cash mountain' that could help them grow further

Hers’s why

London’s businesses have defied the national trend, yet still have at least £219.6bn tied up in excess working capital, according to new figures from Lloyds Bank Commercial Banking.

Firms across London have begun to reduce their working capital, leading to the most stable regional index in the UK. They could still be storing up trouble however, by increasing stock levels ahead of anticipated price hikes and leaving too much cash trapped in working capital, 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 cash in working capital, particularly stock, London’s 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 99.3 for London shows firms in the capital are already reducing their working capital and increasing the amount of cash available in their business for any economic challenges on the horizon. But with £219.6bn still trapped, firms need to make the most of opportunities to release this. 

Ben Stephenson, Global Transaction Banking at Lloyds Bank, said: “Working capital is the lifeblood of any business, and London’s businesses still have work to do to release the huge amounts of money tied up.”

“The cash mountain that London’s service sector and larger companies have locked away could be a positive 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 no access to those funds at times of uncertainty, or if the economy falters, could spell danger.”

“It’s encouraging that firms in the capital are taking measures to reduce working capital, but they have the opportunity to do more.”

“London’s businesses need to be aware of the hurdles they face and how their working capital levels compare with industry norms. This should allow them to unlock cash trapped within their business and use this to fuel further growth.”

Chris Williamson, chief business economist at IHS Markit added: “Businesses across the capital are managing to release more cash, but it is worrying that the UK’s 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

Ben Stephenson 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.”