Why businesses are losing money

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Businesses across London have around £188 billion tied up in working capital, according to new analysis of more than 5,000 UK businesses from Lloyds Bank Commercial Banking.

Working capital is the amount of money that a company ties up in the day-to-day costs of doing business, and tends to increase as businesses grow or as efficiency falls.

The fact that the amount of money tied up in things like inventory or unpaid invoices decreased by 14 per cent in the past year could be a positive sign for the capital’s economy as it prepares to respond to opportunities and challenges created by Brexit.

Tying up too much money in day-to-day costs puts pressure on cash flow and, although the amount is falling, experts fear that the fact that working capital still accounts for 11 per cent of London firms’ revenue could leave many firms ill-prepared to deal with any unforeseen changes.

Nationally, the amount of money tied up in working capital leapt 37 per cent in the past 12 months to £680 billion. This was caused partly by the fact businesses were growing, but also by the fact firms – and particularly smaller ones – were becoming less efficient at collecting cash from their customers.

Stephen Hand, area director for Global Transaction Banking in London, said:

“It’s encouraging that more firms in London are accessing tied up cash from their working capital, to pay down any debt or fuel growth.

“Companies with a healthy cash flow are in a stronger position to take advantage of new trading opportunities, domestic and overseas, and pursue ambitious expansion plans.

“But firms across the capital still have work to do. Businesses in London that fail to manage cash flow effectively may struggle to deal with a potential interest rate rise later this year, or to take on the opportunities and challenges created by Brexit.”

The report also found that, across the UK, revenue growth nearly quadrupled during 2017 to 8.3 per cent, from 2.1 per cent in 2016.

At the same time, firms’ inventory levels increased by 10.6 per cent, while outstanding invoices increased 10.3 per cent.

To deal with the extra working capital, 13 per cent of large firms lengthened the time they took to pay suppliers, compared with just four per cent of small firms.

Payment terms was the second biggest concern affecting firms’ working capital and cash flow, cited by 16 per cent of businesses nationwide, behind demand uncertainty (31 per cent) and ahead of rising costs (13 per cent).