SCOTTISH businesses are under increasing pressure to raise their amount of working capital – the day-to-day costs of running a business – through sustained economic growth and the fall in the value of sterling.
They now have £35.6 billion tied up in excess working capital, according to Bank of Scotland, and it could expose them to greater risks should financial conditions deteriorate. The figure is up 13 per cent from the bank’s last report in May. The bank said sustained growth over the past 12 months, particularly in the manufacturing and services sectors, had increased the amount of cash tied up in the daily running of firms, with the effects of the fall in sterling, forward purchasing of inventory and a rise in input costs being fully realised.
Simon Quin, of Bank of Scotland global transaction banking, said: “The increase in the working capital index in Scotland over the past six months is the highest of anywhere in the UK.
“Significantly, at 105.2, it now suggests Scottish businesses are now under pressure to increase working capital, whereas in April, the pressure was to decrease it.
“This is probably a result of the fact that GDP in Scotland has seen a bit of a resurgence during that time, outstripping the rest of Britain earlier this year, and aided by the small recovery in the price of Brent Crude.
“But 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 Scotland should be managing closely.”
The findings are included in the 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.
Growing businesses tend to use more working capital, while companies focus on releasing cash from it when they are facing challenges.
An index 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.
Scotland’s current reading 105.2 - an increase of more than five points from 99.5 in April.
Quin added: “Whether businesses expect to grow through exporting, or they anticipate challenges due to weakening domestic demand, firms in Scotland could benefit from the operational efficiency and cash flow boost that comes from working capital improvements.”
Why are you making commenting on The National only available to subscribers?
We know there are thousands of National readers who want to debate, argue and go back and forth in the comments section of our stories. We’ve got the most informed readers in Scotland, asking each other the big questions about the future of our country.
Unfortunately, though, these important debates are being spoiled by a vocal minority of trolls who aren’t really interested in the issues, try to derail the conversations, register under fake names, and post vile abuse.
So that’s why we’ve decided to make the ability to comment only available to our paying subscribers. That way, all the trolls who post abuse on our website will have to pay if they want to join the debate – and risk a permanent ban from the account that they subscribe with.
The conversation will go back to what it should be about – people who care passionately about the issues, but disagree constructively on what we should do about them. Let’s get that debate started!
Callum Baird, Editor of The National
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules here