CBI urges action on cash flow

The financial turmoil is putting even healthy businesses at risk by starving them of working capital, the CBI says, as a new survey shows most companies cutting staff, investment, marketing and research and development.

A survey of UK-based companies carried out for the leading business organisation finds half are finding it harder to borrow funds and three-quarters expect the shortage of capital to worsen.

In a 10-point plan published ahead of Monday’s pre-Budget report, the CBI calls on the government to act immediately to help struggling businesses improve their cash flow to avoid prolonging the recession, including a cut in employers’ national insurance.

It says the Bank of England should follow the US lead in guaranteeing commercial loans to help improve the flow of funds to companies struggling to refinance themselves and which will otherwise be forced to shed staff.

It also says the government should act as “insurer of last resort” to support businesses unable to get trade credit insurance. The withdrawal of credit insurance, which has hit smaller businesses most, is bringing the supply chain grinding to a halt, the CBI says.

“The biggest threat hanging over businesses is cash flow,” says Richard Lambert, the director-general. “If they cannot get their hands on the cash and credit they need to go about their day-to-day business, there is a real risk we could see healthy firms going under.”

The government’s bold steps to bolster the banks in October had pulled the banking system back from the precipice, but the process needed to be completed. “The patient is still in intensive care, and business confidence cannot be restored until the fear of further nasty surprises to come is lifted.”

“The lifeblood of companies is cash flow,” says Mr Lambert. “We need to keep business working to safeguard jobs and we need to act now.”

Two-thirds of the companies in the CBI survey affected by the credit crunch say stringent new conditions have been imposed by lenders, while a third say credit has been reduced or withdrawn. Smaller companies are twice as likely as larger companies to be refused new credit and much more likely to face increased costs and loan conditions.

The withdrawal of credit insurance is also damaging trade. “Stuff is piling up in the docks in some cases,” says Mr Lambert.

More than half the companies say they are cutting jobs, and only 6 per cent expect to increase their workforce. Most have shelved plans for capital investment, expansion and marketing, while about a third are reducing R&D or scaling back output.

The mood among the companies surveyed is overwhelmingly gloomy, with pessimists outnumbering optimists five to one when the survey was carried out in the second week of October at the height of the banking crisis. A second survey two weeks ago to see how sentiment had changed found the number expecting things to worsen had risen to 78 per cent, with just 10 per cent expecting improvement.

The uncertainty is causing concerns for auditors that have to certify whether companies are going concerns. Any expression of “growing concern uncertainty” in a company’s accounts could make it harder to raise capital and scare off suppliers – making it a self-fulfilling prophecy.

The CBI has called on the Financial Reporting Council, the watchdog, to produce new guidance for directors to convey “general economic uncertainties” without triggering a growth of concern qualifications in auditors’ reports.

It also proposes a temporary freeze on business rates, restoring empty property relief and changes in tax payment dates and calls for proposed corporation tax rises to be postponed for small businesses,

It wants changes in pension regulation, to avoid a sharp rise in the amount employers have to contribute to reduce pension fund deficits.