There are a number of reasons why inventory has grown in recent years, from hedging against future price rises to the desire to protect supply chains in the face of uncertainty.
Indeed, the amount of inventory that businesses hold has been growing for the past three years. The Lloyds Bank Working Capital Index calculates the pressure on businesses’ working capital, which is the amount of money that a company has committed to the day-to-day costs of doing business. The latest edition, published last month (June), found that inventory levels hit record highs during the first quarter of the year.
Around a third (29 per cent) of manufacturers said they were holding more inventory than in the past, while slightly more (34 per cent) said they were expecting inventory levels to be even higher in a year’s time.
Building up inventory levels carries its own costs – such as buying more raw materials or opening up new warehousing space to store more finished products. But it also has an impact on working capital. As more of a businesses’ money is tied up in inventory, less can be used to protect against unforeseen shocks. At the same time, businesses’ cash flow is being squeezed by slow or late payments.
One in five manufacturers our study spoke to said their customers had taken longer to pay them in the past year – with 14 per cent saying they had paid their own suppliers more slowly as well. All this means that managing working capital has never been more important. Fortunately, there are three steps businesses can take to do this more effectively.
Identify the priorities
Although inventory and payments are two key levers to managing working capital, every area of a business can play a part. The first step to managing it effectively is understanding where the biggest pinch points lie – and which can deliver the most benefit, most easily.
At Lloyds Bank, our working capital management tool can help businesses audit their entire business and understand these bottlenecks. The tool can then help inform businesses about what can be done to ease these pressures.
Create an action plan
With the targets identified, businesses need a clear action plan that engages and motivates all parts of a business to improve working capital.
That plan can cover a multitude of tactics, but as a minimum, it must include a clear framework of governance targets, key performance indicators and objectives for everyone, to ensure that the whole business is pulling in the same direction.
As well as prioritising and planning, there are a range of financial solutions available that will ease pressure on working capital as well as improve their day-to-day situation. As manufacturers have taken a strategic decision to increase inventory, asset-based lending could be crucial.
Asset-based lending can be particularly helpful for manufacturers, given it allows businesses to use physical assets on their balance sheets as security for lending. These assets include receivables, inventory, plant & machinery or property, making it ideal for manufacturers whose working capital requirement has increased rapidly in recent months.
Holding extra inventory can make firms more resilient and can help protect supply chains in the face of potential disruption. But with the right advice and financial tools, effective management across a business can help manufacturers hold the inventory they need without damaging their working capital.