Simon Quin: Working capital is key to Scottish firms

Simon Quin of Bank of Scotland. Picture: Contributed
Simon Quin of Bank of Scotland. Picture: Contributed
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Last September, Bank of Scotland’s Working Capital Index found Scottish businesses had more than £35 billion tied up in excess assets like raw materials, stock and unpaid invoices.

Last September, Bank of Scotland’s Working Capital Index found Scottish businesses had more than £35 billion tied up in excess assets like raw materials, stock and unpaid invoices.

Our latest index report found that figure has dropped to £32bn.

On the surface, this 10 per cent shift might seem marginal, but in reality, it tells us a lot about how Scottish businesses are adapting to the state of the economy and the opportunities and challenges ahead.

Working capital is the amount of money a company dedicates to the day-to-day costs of running a business. When a company ties up too much money in working capital, it will struggle to quickly pursue growth opportunities, or account for unforeseen lulls in business activity at short notice.

In an uneven economic and political climate, not being able to be nimble in this way can ultimately harm a business’ success.

The fact Scottish firms have improved their working capital position in the last eight months should be welcomed. It contrasts starkly with the UK-wide picture. The amount of money tied up in working capital across Britain leapt by 37 per cent in the past 12 months to £680bn, caused in part by the fact firms – and particularly smaller ones – have become less efficient at collecting cash from customers.

Businesses across Britain waited an average of 48.9 days to be paid during 2017, up from 48.2 the year before. On that basis, the fact that the figure has fallen in Scotland is good news. While there are undoubtedly other factors at play as well, our experience speaking to businesses across Scotland suggests they are taking proactive steps to tackle slow and late payments and to reduce working capital.

Doing so is not easy.

Operationally, correct and timely information and reporting processes must be put in place to analyse suppliers, payables, debtors and collection processes. Inventory-management information should be at the right level of detail to focus attention on areas of improvement.

Firms then need an action plan that can be rolled out across every department of a business, with KPIs, targets and objectives.

If an organisation is not fully motivated and aligned to the goal of working capital improvement, any programme will meet resistance. Equipping staff with the right skills and knowledge will go a long way towards increasing focus and ensuring positive changes are sustained.

We know that undertaking a programme of broad measures to improve working capital management can typically release around 3 to 5 per cent of turnover in extra cash.

This can then give firms the ability to invest in growth, pay down debts, or generate the liquidity needed to respond to any new opportunities or challenges that may be ahead.

•Simon Quin is SME director at Bank of Scotland global transaction banking