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8 July, 2020 - 21:25 By Tony Quested

Companies start to feel crippling cash strictures, says BDO

Cash generation of businesses in East Anglia has stayed worryingly low heading into the financial crunch that’s starting to be triggered by the COVID-19 pandemic, according to a new study by BDO.

BDO’s analysis of UK businesses shows that those in East Anglia converted just 2.1 per cent of the value of their sales into free cash flow on average last year. 

The average for businesses in East Anglia has stayed low after falling from a mean of 3.7 per cent just four years ago, prior to the EU referendum.

BDO says that whilst many East Anglian businesses have fared well since the start of the pandemic, some are now starting to see greater pressure on cash. They have sustained cash flow through furlough, the coronavirus business interruption loan scheme and VAT deferral offered by the Government. 

Now the situation is starting to bite hard: The effects of lockdown on sales and the rise in unpaid invoices are starting to see cash flow dry up. The effects of the forthcoming reduction in furlough, over-trading coming out of lockdown, redundancies and the end of VAT deferral will all add to this pressure. 

The new squeeze comes on top of the pressure on farm produce prices for East Anglia’s key agricultural industry over recent years.

BDO is able to salvage a glimpse of light from the gloom. It says the diversity of the region’s economy should insulate East Anglia from COVID-19 more than some other parts of the UK. In particular, Cambridge’s advanced technology and biomedical cluster should act as a driver of cash generation in the future, once more of its businesses reach maturity and pass their break-even point.

Sarah Elms, Partner at BDO, says: “The impact of COVID-19 has triggered a cash flow crisis for many businesses across the UK but so far East Anglia has been quite robust. However we are now starting to see signs of this changing and anticipate this pressure will increase in the coming months.”

“Our region’s balanced economy does give us confidence that we can bounce back quickly, however. Both Cambridge’s high-tech cluster and the agricultural industry in Norfolk and Suffolk are well positioned to rebound when lockdown ends.

“Other regions that are more reliant on industries like manufacturing have been much harder-hit and will likely take longer to recover than East Anglia.
“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
  • 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.

Elms 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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