Businesses pay the price for cancelling investment?

With bank rates as they are, keeping cash in the bank isn't worth much to firms...

Last Updated: 31 Aug 2010

Are UK firms missing a trick? That's the suggestion of some new research from Investec Private Bank: its analysis of around 200 firms with a turnover of more than £1m suggested that medium-sized UK companies may be sitting on some £626m in cash - because they've pulled the plug on investment projects due to the economic climate. Since banks are paying such a miserly rate of interest at the moment, they might as well stash it under their metaphorical mattresses. And either way, they might live to regret not making this investment in a year or two's time...

Apparently around 9% of the firms surveyed by Investec said they were sitting on cash because of cancelled or delayed projects - in some cases this was less than £5,000, but in others it was a six figure sum. All told, the average per firm was just under £40,000 - and if you extrapolate across all UK companies of this size, you end up with a sum total of over £600m. That's a lot of cash; and with interest rates as they are, it won't be doing much for them.

You can understand why firms are feeling cautious about investment; given all the uncertainty surrounding the economy at the moment, it's hard for them to know whether now is the right time. Some clearly feel the prudent approach is to hang on until things pick up a bit, which also means they have a decent cash fund to cover unexpected eventualities - like cashflow problems caused by clients going out of business, and so on.

Investec obviously has its own agenda here (to plug its own rates - which apparently are slightly less miserly than everyone else's). But perhaps the more significant question is whether some of these firms should be putting their money to better use. If you've actually got cash to spend, this could be a great time to invest - especially since many of your competitors won't be, and especially since the alternative is to leave it in a bank account earning next-to-nothing.

It's a tricky call - rainy day funds are one thing, but stashing away tens of thousands earmarked for investment smacks slightly of over-caution. And not investing now could mean that if things pick up next year (admittedly a big if), they may find themselves struggling to keep pace.

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