14 December 2020|Latest Posts, Money
Adam Simpson, Commercial Director at Liquidity Club says that CEOs need to understand the processes in their businesses that will unlock working capital.
In any growing business cash is king. However, political uncertainty over the last three years has seen UK companies make money at a slower rate, while spending increasing amounts of working capital on the process of stockpiling. This is proving a dilemma for those CEOs who want to take their company to the next level.
As we approach a crucial juncture for the UK economy, it is imperative that business owners focus on their working capital requirements.
Cashflow under pressure
The latest Working Capital Index report by Lloyds Bank shows that a third of firms surveyed by IHS Markit said managing working capital, in the context of political and business uncertainty was “the biggest concern for the year ahead”.
Drilling down into these figures further shows that 29% of manufacturers surveyed said they were holding more stock – presumably because of any disruption caused by Brexit. Stockpiling puts company’s cashflow under significant stress and is funding that could be spent on expanding the business. It also affects changes to a business’s operating model. One firm mentioned in the Lloyds report said that it has established a new warehouse so that it could better manage its supply chain in Europe.
Short term gain – long term pain?
In May, the CBI Industrial Trends Survey showed that 35% of firms surveyed said their present stocks of finished goods were more than adequate, whilst 9% said they were less than adequate, giving a balance of 25% – the highest balance since March 2009 and noticeably above the long-run average (+13%).
However, there remains a dichotomy here as many firms surveyed by Lloyds expected stock to run down next year, meaning they are impacting their cashflow now for relatively short-term gains.
Stockpiling is expensive for businesses, but it did boost GDP growth in late 2018 and in the first six months of this year. However, many fear that it will have an impact on growth and GDP figures in the rest of the year. With this in mind it would not be surprise to see the UK economy experience slower growth than normal while companies use up the extra stock they now have.
Slowdown in turnover generation
The Lloyds Bank Capital Working Index shows that the near-9,000 companies that surveyed saw their combined working capital increase by almost 41% over the last four years – equivalent to £41.1bn. However, over the same period, revenue at the firms grew by only 20%, meaning that they are holding onto more working capital than is relative to their turnover.
Meanwhile, over the last three years, the report found that the average cash conversion cycle, a measure of working capital efficiency, for larger firms has increased by just over six days in the last three and at smaller firms by nearly two days.
These figures show that firms are now holding higher levels of working capital and that generating turnover is taking longer. Worryingly, SMEs are taking seven days longer to tie up cash than their larger counterparts. However, this is down from a record high of almost 12 days.
The stockpiling of goods isn’t an issue that is going away in the short-term, it seems. The Working Capital Index points out that high inventory levels have hit historic highs over the last quarter.
Going back further, and Lloyds’ analysis shows that over the last three years (or since the vote to leave the EU), total inventory for the firms surveyed leapt by almost £35bn, or 29.2%.
In 2016 the annual rate of growth was 12.6% but this has slowed to 5.6% in 2018. This has meant that stockpiling has been at the forefront of the mind for business owners. While many expected the political uncertainty surrounded Brexit to be over by now and these stocks to have run down, a Catch 22 situation has arisen with continued uncertainty meaning that the extra inventory is carrying a cost both in terms of working capital that needs financing, logistics and storage charges.\
Review every option
It now seems certain that the UK will leave the EU on 31 October, but that remains the only certainty, with the outcome of the decision yet to be felt.
Preparation, then, is crucial. With cashflow and management of working capital critical over the coming months, now is the time to review your financing options and plan ahead for all eventualities post-October 2019.
Ask yourself this: do you have a full understanding of the processes in your business that will unleash the cashflow you need to make your business grow?
If the answer is no, then now is the time to take action to remedy this shortfall, as cashflow is critical when enacting change for your business.