South East firms could be left ill-prepared to deal with unforeseen challenges as a new report suggests they could be tying up the equivalent of 7% of their total revenue in working capital.
Businesses across the South of England have around £168 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 locked in things like inventory or unpaid invoices jumped by 47% in the past year could be a positive sign for the regional economy.
But tying up too much money in day-to-day costs puts pressure on cash flow and experts fear that the fact that working capital now accounts for such a large proportion of firms’ revenue in the South of England could leave many firms ill-prepared to respond to change.
Nationally, the amount of money tied up in working capital leapt 37% 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 customers.
One firm that has managed its working capital to ensure it could invest in growth without damaging its ability to respond to change is Lasered Components.
The laser-cutting business, which is based in Essex, used a £1 million working capital facility to buy a fibre-loading machine to speed up the manufacturing process, without needing a large up-front payment that could damage its cash flow.
The machinery increased the firm’s productivity by 60% and the company is now targeting 25% year-on-year turnover growth.
Stephen Hand, area director for Global Transaction Banking in the South East, said: “Firms in the South East need to prioritise efficiency as revenues grow.
“The region has the lowest proportion of their revenues tied up in working capital in the UK – but progress can still be made.
“By accessing tied-up cash, trapped in inventories or unpaid invoices, companies can kickstart their growth plans and leave them ill-equipped to deal with new challenges.
“Companies like Lasered Components that effectively manage their cash flow are able to maintain a healthy cash flow and will be best placed to respond to future opportunities and challenges created by Brexit.”
The report also found that, across the UK, revenue growth nearly quadrupled during 2017 to 8.3%, from 2.1% in 2016.
At the same time, firms’ inventory levels increased 10.6% during 2017, while outstanding invoices increased 10.3%.
To deal with the extra working capital, 13% of large firms lengthened the time they took to pay suppliers, compared with just 4% of small firms.
Payment terms were the second biggest concern affecting firms’ working capital and cash flow, cited by 16% of businesses nationwide, behind demand uncertainty (31%) and ahead of rising costs (13%).
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