Midlands has £42bn in ‘hidden’ cash
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Sustained economic growth and the fall in the Sterling exchange rate have put record pressure on businesses in the Midlands 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 the Midlands now have around £42bn tied up in excess working capital – up nine per cent from £38.5bn 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.
Lloyds says the sustained growth seen nationally in the past 12 months – particularly in manufacturig 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.
Tim Hanley, area director for Lloyds Bank Global Transaction Banking in the Midlands, said: “The fact that the Midlands has seen its working capital index rise in the past six months suggests that businesses here are under rising pressure to increase the amount of cash they have available for working capital.
“This could be a positive sign as it suggests that the manufacturing businesses that dominate the region’s economy are both growing and are confident that they can access the cash they need to fund further growth.
“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.”
The findings come from Lloyds Bank’s second Working Capital Index, a six-monthly report that uses Lloyds Bank Regional Purchasing Managers’ Index (PMI) data to calculate the pressure British businesses are under to either increase or decrease working capital.