Scottish firms missing out on growth-boosting “cash mountain”

Too much cash lost in working capital, says Bank of Scotland

Scottish businesses have bucked the national trend, but still have at least £31.5 billion tied up in excess working capital, according to new figures from Bank of Scotland.
Firms across the country have begun to reduce their working capital, but could still be storing up trouble by holding large amounts of stock ahead of anticipated price hikes, which means too much cash is trapped in working capital, Bank of Scotland’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, Scottish 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 Bank of Scotland Working Capital Index is a new six-monthly index launched today that uses the Bank of Scotland 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 99.5, which is down from a high of 104.8 in October, indicates that prudent Scottish firms have begun reducing their working capital and increase the amount of available cash in their business, as economic indicators warn of possible storms to come.
But even though Scottish firms have bucked the national trend by reducing their working capital, they still have the opportunity to release £31.5bn more.
Colin Walls, Managing Director of Global Transaction Banking at Bank of Scotland, said: “Working capital is the lifeblood of any business, and our research shows that Scottish businesses have huge amounts of money tied up in it.
“This cash mountain could be a good sign: businesses can afford to stock up and tie up increasing levels of cash in working capital when they are performing well and focused on growing their business.  But having those funds locked away at times of uncertainty, or if the economy falters, could spell danger.
“That’s why it’s good to see Scottish firms are bucking the national trend and taking steps to reduce working capital, though they still have an opportunity to do more.
“By understanding the hurdles they face and how their working capital levels compare with industry norms, British businesses can use this insight to unlock the cash trapped within their business, become more efficient and realise their full potential.”
Chris Williamson, Chief Business Economist at IHS Markit, added: “While Scottish businesses are bucking the trend, it is worrying that British 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
Region
Working Capital Index score
Cash tied up in excess working capital
South & East
107.1
£138.3bn
London
99.3
£219.6bn
Midlands & Wales
108
£48.9bn
North
105.9
£59.6bn
Scotland
99.5
£31.5bn

Walls 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.”