Cash generation of North West businesses worryingly low

Mon, June 22nd, 2020

BDO’s analysis of UK businesses shows that those in the North West converted...

Cash generation of businesses in the North West has stayed worryingly low heading into the cash crunch triggered by the COVID-19 pandemic, a new study by accountancy and business advisory firm, BDO, shows.

BDO’s analysis of UK businesses shows that those in the North West converted just 2.3% of the value of their sales into free cash flow on average last year, for accounts filed by March 31, 2020.

The average for businesses in the North West has stayed stubbornly low after falling from an average of 2.8% just four years ago, prior to the EU referendum.

The firm also says that businesses in Merseyside generate more free cash flow – an average of 2.6% of sales converted to free cash – than those in Greater Manchester, an average of 2.2%.

BDO says that as well as having a hub of high-cash flow financial services businesses as Manchester does, Merseyside has the edge thanks to the cash-generative pharmaceuticals businesses located in the region.

The firm says that many key North West businesses have faced major cash flow challenges since the start of the coronavirus crisis.

The effects of lockdown on sales and the rise in unpaid invoices have seen cash flow dry up for businesses, affecting many sectors including the critical North West advanced manufacturing industry. The aerospace and automotive sector supply chains have been particularly affected.

Mark Sykes, BDO Drive partner, said: “The impact of COVID-19 has triggered a cash flow crisis for businesses across the UK, and the North West has been hit hard. We’ve already seen some major businesses in our region forced to lay off staff as a result.

“With the advanced manufacturing industry being such a big part of the local economy, particularly in Cheshire and Lancashire, it’s vitally important that the Government continues to do everything it can to protect jobs here.

“With an end to lockdown on the horizon, a return for car sales and international travel would be a boost to our region’s manufacturing sector.

“Our region’s economy has been a real success story over the last few years, with Liverpool’s economy particularly cash-generative thanks, in part, to the major pharmaceuticals businesses in the area.

“Regeneration in Manchester and Salford has also created the biggest media hub outside London. That gives us confidence in how quickly we can return to normal.

“That free cash generation was relatively low for so many businesses in the run-up to the outbreak is a worrying sign. To survive this crisis you need good cash flow – improving that, in these conditions, is harder but achievable.”

Free cash flow is a measure of how much cash a business generates, calculated as income less expenses, including tax on profits and after capital expenditure, such as investment in equipment and machinery.

In effect, it is the net cash available to pay dividends to shareholders, expand the business and build up a ‘cushion’ of cash in case of economic disruption.

A business that converts five per cent of the value of its sales to free cash flow is generally seen as very healthy and cash-generative.

Key steps businesses can take to improve free cash generation could include:

  • Chase outstanding debts harder – send regular demands for payment rather than statements of account;
  • Maintain a programme of regular negotiation of terms with suppliers and have a full costs review once a year;
  • Outsource services wherever possible, such as finance and IT functions; and
  • Maximise the tax reliefs you are entitled to – R&D tax relief is still not properly understood and claimed by a number of UK businesses.

Mr Sykes added: “Maximising cash generation has always been vital and is one way to help protect a business in an unexpected downturn.

“Every business should now be looking at what it can do to grow and maintain its free cash flow.

“Managing invoicing more efficiently, implementing a cost reduction process, keeping inventory levels under control, restructuring debt and re-banking should all be on the agenda.”

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