Cash flow: Show me the money

When the downturn struck, Booths was better prepared than many businesses in the UK. The family-owned grocery chain, which operates 28 stores in the north-west of England, has been part of the retail landscape since 1847 and has seen its share of peaks and troughs in the economic cycle.

The fallout from the credit crisis of 2008 was not immediately noticeable in Booths’ business fortunes, says John Vandermeer, finance director. “People still appeared to have money in their pockets, especially as our customers tend to be among the more affluent,” he says. “It’s really in the past 12 months that we’ve begun to see some impact. Unemployment and fuel costs have begun to affect spending habits.”

Booths was fortunate last year, too, when it sought refinancing to help fund expansion. “The banks have always seemed to have an appetite for what we’re trying to achieve,” Mr Vandermeer continues, “although our original bank did suggest we bring some others on board.”

Other British companies, however, have enjoyed less success when they went to the bank. The total value of loans to private, non-financial companies dropped by £1.7bn in March, according to the Bank of England, and overall lending to businesses is falling by more than 3 per cent a year.

For many businesses, credit has all but dried up in the years since the financial crisis, forcing them to rethink how to manage their cash flow and liquidity – or perish.

“If you go back to the pre-crisis period, you wouldn’t see businesses placing the amount of emphasis on cash flow and working capital management that they are now,” says Lesley White, head of Europe, Middle East and Africa treasury products for corporates at Bank of America Merrill Lynch.

“Post-crisis, with bank lending much tighter, the importance of effective, efficient cash-flow management has increased. Cash flow is the life blood of the business.”

There are signs that companies – especially in the UK – are adapting to this reality. According to Treasury Strategies, a financial consultancy, UK-based companies have been building larger piles of cash than their counterparts in the US and eurozone since well before the credit crunch began. Cash held by British companies amounted to 50 per cent of the UK’s gross domestic product at the end of 2011, compared with 26 per cent in 2000, Treasury Strategies says.

By contrast, US corporate cash was about 14 per cent of GDP at the end of 2011 compared with 10 per cent in 2000, and eurozone companies’ cash was 21 per cent versus 15 per cent.

“It could be that UK companies are generally more conservative in their approach to cash,” says Monie Lindsey, managing director and head of the London office of Treasury Strategies. “But 2008 made everybody more cautious, and whether you call it hoarding or insurance, companies don’t want to get caught out.”

Nevertheless, banks’ continued reluctance to extend credit is forcing companies to cast their net much wider to secure the cash they need.

Clive Lewis, head of enterprise at the Institute of Chartered Accountants in England and Wales, says: “There is a general understanding among businesses of the importance of cash flow. Many companies have raised it on their priority list.

“But businesses need to remember that there is a whole range of finance options. Term loans and overdrafts are still very popular. But they should also consider options such as asset finance, hire purchase and leasing, invoice discounting and, for some, equity.”

Mr Lewis adds: “It boils down to basic, good financial management. And you need to talk about it regularly in board meetings and make sure you have a high standard of financial forecasting.”

Ms White at Bank of America Merrill Lynch says companies are also reorganising their internal processes, supported by systems to improve their cash flow. “Anybody who had a crystal ball in 2007-08 would probably have renegotiated their finance conditions before the crisis, even if they weren’t up for renewal,” she says. “But treasurers also need to make sure they are looking at all aspects of their business impacting working capital management, including supply chain and inventory, to ensure that cash is managed properly.

“Whether you are a medium-sized corporate or a large multinational, there is a lot of emphasis on how to be more efficient when it comes to cash-flow management, and understanding the profit and loss impact of the supply chain,” she says. “This could mean negotiating better terms with suppliers. Sometimes just moving payment methods from paper to electronic will make a difference, or moving to other available instruments, such as direct debits.”

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Companies also need to consider whether their cash pile is being put to best use. Jose Franco, global head of corporate banking liquidity at Bank of America Merrill Lynch, says: “With all the uncertainty in the market, a ‘fortress balance sheet’ is vital. But there is the threat that it will be eaten up by inflation due to the low [interest] rate environment.”

This is why an effective cash-flow management strategy also involves investment. “Cash flow and investment strategy go hand in hand because the stockpile of cash causes other challenges,” says Mr Franco.

“Cash can be classified as operating cash, which is needed immediately; reserve, which is needed in a 6-12 month window; and strategic, which isn’t needed so can be invested for the longer term. That investment could be in an instrument or it could be in purchasing one of your suppliers, or even a similar business in another geography. But the critical point is that not all cash should be treated as operating,” he explains.

Mr Franco adds that the emphasis on effective cash-flow management is likely to remain a focus for businesses for the foreseeable future. “It wasn’t critical when credit was cheap,” he says, “but risk appetite will also become more important in the next five years as interest rates rise. The UK and the US are in a strong position, Europe is challenged.”

At Booths, Mr Vandermeer says the company’s refinancing has secured funding for the next four and a half years. But he says an understanding of cash flow is critical to ensure that the company does not overextend itself in its expansion plans.

“We have seven or eight stores in the pipeline, and there are a lot of factors that will impact when a new store build will come through,” he says. “But a lot of the control is still within our remit, which helps an awful lot from a cash-flow planning point of view.”