Local firms could be storing up trouble by building up their stock levels ahead of anticipated price hikes, causing the levels of cash trapped in working capital to increase, Lloyds Bank’s research found.
The bank publishes research today claiming that companies in northern England have at least £59.6bn tied up in excess working capital – 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 and, by tying up more cash in working capital – particularly stock – Yorkshire firms could be missing out on a “cash mountain” and be left exposed if economic conditions deteriorate.
Andrew Charnley, from the bank’s global transaction banking team in Yorkshire, said: “Working capital is the lifeblood of any business, and our research shows that northern businesses have huge amounts of money tied up in it.
“This cash mountain suggests that companies are either feeling more positive about the future or that they are reducing their focus on this critical area of business performance. This 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 focussed on growing their business.
“But, having those funds locked away at times of uncertainty, or if the economy falters, could spell danger.
“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.”
Chris Williamson, chief business economist at IHS Markit, said it was “worrying” that firms are under pressure to increase working capital at a time when other indicators suggest the economy is starting to slow.”