Firms building up cash reserves

Businesses are storing up surplus cash against further downturns in the economy, a new report has suggested.

As part of its six-month survey of business activity, Lloyds TSB reported that smaller firms are depositing record sums of money into their business accounts.

John Maltby, managing director at Lloyds TSB commercial, said that firms seemed to be preparing themselves for further falls in sales and profits.

Mr Maltby commented: “We are taking record levels of deposits from businesses. What it says is that businesses are looking to conserve cash. Maybe they are cutting back on investment spending or maybe employment spend. They are looking forward and seeing lower profits so in the short term they are being careful about their businesses today.”

He added that many firms appeared to be in a better position to handle the current downturn than in previous periods when trading conditions became difficult: “If you think back to historical slowdowns or recessions I don’t think balance sheets were in the strong position that they are in today.”

The Lloyds TSB survey indicated that small firms are well advised to be ready for more challenging times.

The report said: “UK firms are the least confident about their own business activity than at any time in the 16-year history of the survey.”

The proportion of businesses that were experiencing cashflow issues climbed to 23 per cent, its highest point in nine years.

However, the bank said that, while cashflow had become more problematic, the percentage of firms suffering from late payments is still less than half of the 56 per cent that reported similar difficulties in the recession of the early 1990s.

There was also optimism amidst the concerns. Although domestic orders have dropped since the start of the year, exports have risen, with firms making the most of the fall in the pound’s value against the euro.