Companies harness cash but capital expenditure plans undermine future economic recovery

KPMG's second annual cash survey has found that UK companies have pushed cash generation up the agenda in response to the changing demands of analysts, lenders and ratings agencies.

 

Andrew Ashby, associate partner at KPMG, commented:
"Where companies last year were most worried about the rising cost of debt, they are now worried about the needs of their banks and other stakeholders. This is reflected in a change in strategy: while only 2% of respondents had implemented a working capital improvement programme last year, 50% of respondents have now instigated an improvement programme. This change of approach has been necessitated by the increase in working capital: 45% of respondents have seen a deterioration compared with just 1% last year.  Increased focus on cash management is yielding some results in forecast accuracy; while 91% of respondents said they had missed their targets last year, only 38% said the same this year. Indeed a third of respondents exceeded their forecasts."

While this year's survey has found companies improving their cash management, they are not optimistic about the future and indeed their cash management tactics could hinder economic recovery. Ashby went on to say:
"Somewhat surprisingly, while companies are increasingly hitting cashflow forecasts and improving working capital they are not positive about the future: 55% expect no improvement in working capital in the next 12 months. Companies are most concerned about customers stretching payments terms and getting into financial difficulty.  Perhaps the most concerning findings show how companies plan to respond to worsening economic conditions: 68% are planning to slash capital expenditure; 45% tightening credit lines to customers and 33% negotiating longer payment terms from suppliers. Clearly this does not bode well for return to economic growth."

Key data:

  • 33% of respondents said the main trigger for focussing on cash was pressure from stakeholders, compared with just 12% last year;
  • 38% did not meet cashflow forecasts this year, compared with 91% in 2008;
  • 45% saw an increase in working capital, compared with 1% last year;
  • 50% of respondents have instigated a working capital improvement programme this year, compared with just 2% last year;
  • In response to the tightening credit market: 68% are reducing or stopping capex; 63% are seeking to improve cash generation and 45% are tightening credit lines to customers (multiple choice).

Looking ahead to the next quarter and beyond, Ashby went on to say:
"In the short term, companies are facing additional pressures, as many industries restock. In retail, this time of year is a traditional crunch point due to stock build up for the Christmas period and rent payments in late December. Clear visibility of cash flow and accurate forecasting is critical to avoid financial stress.

"It will be interesting to see whether stringent cash management will retain its importance in analyst and credit rating agency assessments when the upturn comes. Ultimately board behaviour will be heavily influenced by the views of lenders, analysts and credit rating agencies. Unfortunately our research suggests that best practice is not being ingrained into the DNA of companies. While 83% of our respondents placed cash management as a top 5 strategic priority, only 33% link management incentivisation to cashflow targets. Cash is the life blood of the business but history teaches us that it is all too easily forgotten in the good times."



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