UK businesses were struggling to generate cash flow prior to the COVID-19 coronavirus, with car retailers among the nation’s worst performers, according to research published by BDO.
A new study by accountancy and business advisory firm claimed that cash generation was “worryingly low” heading into the “cash crunch” triggered by the pandemic.
BDO’s analysis showed that UK businesses converted just 2.6% of the value of their sales into free cash flow on average last year and that figure was just 0.8% for housebuilders and 1.3% for car retailers.
This figure has stayed stubbornly low after falling from an average of 3.3% prior to the EU referendum.
The largest 100 companies in BDO’s research – all with annual turnovers of more than £3bn – turn sales into free cash at a much healthier average rate of 9.6%.
However, performance among mid-sized and smaller companies (with a turnover of between £2 million and £200m) has dragged the average down for UK businesses as a whole, as they convert sales to free cash flow at an average rate of just 2.5%.
Mark Lamb, business advisory partner at BDO, said: “The impact of COVID-19 has triggered a cash flow crisis for a huge number of businesses.
“The fact 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 cash flow, in these conditions, is harder but achievable.”
Speaking in the latest AM digital magazine's News Insight feature focussing on the changes car retailers have made in order to mitigate against the effects of COVID-19 and adapt to the “new normal”, BDO audit partner, Steve Le Bas, told AM that car retailers need to be emerging from lockdown in strong shape following the availability of Government loans, cheap finance from banks, VAT deferrals and breaks to business rates leases and mortgage payments.
“Groups should be emerging from lockdown with plenty of cash in the bank. If that isn’t the case, the coming months are going to be a struggle,” he said.
“The job now is to make that cash last and try and use it, and the furlough scheme, to manage the business to a point where demand has returned.”
BDO says that the fall in free cash flow generation across the UK in recent years is likely to have been driven, in part, by businesses being forced to compete more heavily on price, quality and service delivery in a slowing economy.
The firm says that this low level of free cash generation could cause significant problems, as it gives businesses little opportunity to retain cash as a buffer in case of cash flow pressure.
According to BDO, the key steps businesses could 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.
In his monthly profitability report, published earlier this month, ASE chairman Mike Jones has urged car retailers to focus on their "cash position" after the sector's businesses lost an average of £63,000 during April’s COVID-19 lockdown.
He said: “Having survived the shock of lockdown, retailers need to spend significant time forecasting their cash position.
“Many working capital balances will deteriorate as we ramp up trading and retailers need to plan to mitigate.”
Commenting on BDO's research into cash flow generation, Lamb said: “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.”
BDO’s analysis also shows that businesses in London and Edinburgh are on average the most cash-generative in the UK. London businesses (6.2% of sales converted to free cash) and Edinburgh (5.9%) are both major centres for sectors with strong free cash flow, including financial services and the legal and accountancy professions.
At the other end of the table, regions with the lowest average levels of free cash generation are Lincolnshire (1.2%) and Dorset (1.3%) where cash generation was impacted by sharp pressure on margins in the agricultural sector in recent years.