Research by Lloyds Bank has demonstrated that UK companies – and manufacturers in particular – are storing up large amounts of working capital on their balance sheets to hedge against uncertainty.
Peter Osborne discussed the issue with David Atkinson, UK Head of Manufacturing at Lloyds Banking Group’s Commercial Banking division, who says manufacturers should consider ways to release some of that working capital to invest in the future.
David Atkinson: What our latest Working Capital Index report has shown is that there’s somewhere in the region of £535bn of cash tied up in surplus working capital in British businesses.
We believe there’s an opportunity to release up to 5% of a business’s turnover or sales in additional cash back into the business. This would help fund investment, growth, new opportunities overseas, and invest in plant, machinery and skills.
Why are companies seeing so much cash tied up?
It’s a mixture of threat and opportunity. One in four are challenged with changes to payment terms, while 12% are using their cash to invest in CapEx. More broadly, companies have been trying to mitigate the inflationary pressures caused by the devaluation of sterling through growing inventory levels since Britain’s decision to leave the EU.
Firms in some cases don’t feel they’ve got the opportunity to pass on the increased costs, either because of contracts they’re in, or because they’re nervous about losing contracts and opportunities.
They’re trying to absorb those costs, while at the same time taking further cash out of the business to drive investment into automation and robotics. In turn, it is hoped this will improve productivity, remove waste, and absorb inflationary pressures.
This article first appeared in the November issue of The Manufacturer magazine. To subscribe, please click here.
The Manufacturer recently sat down with David Atkinson to discusses the reasons why the UK struggles with productivity so much. You can view the video here.
Do you think manufacturers should take greater advantage of support systems in the marketplace to help them deploy working capital more effectively?
Yes, I do. While we are seeing increased investment in training, with just under two-thirds of manufacturers planning to take on apprentices, the worrying part is that the vast majority, around 80% of them, don’t actually have a strategy in place to access the funding available through the Apprenticeship Levy.
Another report by the accountancy group MHA, which Lloyds sponsored, revealed that while around nine in ten manufacturers are investing in R&D, nearly half don’t actually take advantage of claiming back R&D tax credits from the government.
So, again, they’re missing out on an opportunity to improve cash flow in their businesses.
Turning to the wider investment picture, are manufacturers hearing the message that they need to invest in their future?
We’ve seen a significant uplift this year in both the volume and value of the deals that we’ve been doing for plant and machinery. This is driven by manufacturers’ plans to invest in digitalisation, or opportunities presented through Industry 4.0.
Indeed, the MHA report says this year 92% of respondents saw industry 4.0 as an opportunity. So yes, there is an increasing trend of firms investing into more new technology. They are investing in software systems too, such as ERP and MRP to help improve their efficiency and productivity.
I’ll give you an example of how investment really creates returns. A company we work with called Seminar Components wanted to improve productivity and output to take advantage of new opportunities in overseas markets.
We supported them with a hire purchase and lease facility to invest in two new robotic welding machines; they’re now aiming to increase production by more than 25% this year, which is helping them expand into those new international markets, creating greater profitability.
We’re hearing that customers further up the supply chain are beginning to insist that their suppliers invest in new digital technologies.
Yes, in some cases they are expected to invest in digitalisation to improve connectivity, productivity, efficiency and to minimise and mitigate breakdowns.
For those businesses that haven’t taken that step yet and don’t understand how to do it, I would urge them to talk to experts or even customers further up the supply chain; we’ve got some great examples of businesses offering to support them in exploring how to invest because everybody can potentially win.
The full MHA survey, sponsored by Lloyds Bank, can be found here.
Lloyds Bank’s analysis on improving working capital management can be found here.
The customers get an improved margin because of the improved efficiencies helping to deliver cost down programmes, and that gets shared with the SMEs in the supply chain. In turn, this can help the supply chain generate opportunity for further investment.
And if they can release cash from their working capital to drive investment opportunities, it starts to create a snowball effect of opportunity for those manufacturers – they are better placed to take advantage of some fantastic emerging opportunities in the UK and in new markets overseas.
We can help them identify opportunity through our International Trade Portal, and connect them with government bodies that support trade and exports.
So, despite the allegations that banks are not lending properly, there is support available?
We committed to lend no less than £4bn of new money into the manufacturing sector between 2013 and 2017. In June this year, we hit that target six months early and we are continuing to lend at a rate of £1bn-a-year.
There’s no better time to invest. The cost of technology is as low as it’s ever been and the opportunities to drive productivity and efficiency through carefully managed and well thought-through investment plans can reveal some fantastic opportunities.
I’d also urge companies to invest in people and skills. We know the sector is facing a skills shortage and at Lloyds Bank we are helping to address this through a £5m investment into the Lloyds Bank Advanced Manufacturing Training Centre at Coventry.
This will support more than 1,000 trained engineers and apprentices out into industry by 2020.