British businesses have around £680 billion tied up in working capital, according to new research on more than 5,400 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.
Lloyds Bank’s Working Capital Index found that businesses’ annual revenues have increased, on average, causing the amount of cash tied up in inventory or unpaid invoices to increase by 6 per cent in the last year.
This puts pressure on firms’ cash flow and could leave many firms ill-prepared to quickly access the funds they might need to take on any unforeseen opportunities or challenges.
While partly caused by the fact businesses were growing, the report also found that firms – and particularly smaller ones – were becoming less efficient at collecting cash from their customers, making the problem worse.
Ed Thurman, managing director, head of Global Transaction Banking at Lloyds Bank, said: “Revenue growth is good news for British business, but to improve efficiency is going to take investment and that requires cash flow.
“Small firms in particular are taking even longer to free up cash from inventory and unpaid invoices. The longer that money remains unavailable, the less firms can invest in growth, new machinery or pay down debts.
“Companies that manage their working capital well can generate healthy cash flow and will be best placed to invest in their businesses and take advantage of new trading opportunities
“Those who don’t may find it difficult to deal with a potential rise in interest rates later this year, or to take on the opportunities and challenges created by Brexit.”
The report found that annual 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 10.6 per cent during 2017, while outstanding invoices increased 10.3 per cent
Firms responded by lengthening the time, in days, that they took to pay suppliers. But this primarily benefited larger firms, 13 per cent of whom said they were now taking longer to pay suppliers, compared with just four per cent of small firms.
Looking ahead, almost a third of businesses (31 per cent) said demand uncertainty was their biggest concern affecting their management of working capital and cash flow in the year ahead. This was followed by changes to payment terms (16 per cent) and rising costs (13 per cent).
Lloyds Bank has recently partnered with Be the Business, a new free to join and use business movement set up to unlock practical and pragmatic practices that help productivity and share them across the UK.
Tony Danker, chief executive of Be the Business, said “Productive companies get more out of what they’ve got, enabling them to increase their profits, pay higher wages and invest in their future. This Lloyds Bank research shows the importance of closely managing working capital and how even small improvements can yield dramatic results for a business.
“Through our partnership with Lloyds Bank we hope to support as many UK firms as we can to put in place the simple management and business practices used by the best to be successful.”