No respite from retail insolvencies
The latest quarterly statistics from the Insolvency Service showed a 9.3% increase in companies being declared insolvent in the third quarter of 2009, compared to the same period last year.
By Helen Dickinson
Some 1,578 companies entered administration, receivership or a company voluntary arrangement (CVA), no longer able to withstand the repercussions of six quarters of recession and almost a year of tight credit markets. Although the breakdown by industry sector for the quarter was not yet available, my colleagues in restructuring are predicting a continuation of the difficult market conditions for many businesses, including further retail insolvencies in the run up to Christmas and beyond.
All well-managed retail businesses are going into the Christmas trading period with tighter stock positions than they had at this time last year when consumer demand was hit hard by the global financial meltdown. Destocking has been a key theme in retail this year and those that have got the delicate balance of accurately predicting demand and matching this with their stock and working capital needs right, they will do well.
However, there are other retail businesses that have continued to struggle with cash flow and have been forced to go “extra” lean on stock orders. Even if they did well in the summer and now gauge Christmas custom as potentially better than expected, it may be too late for them to fulfil orders, which means their traditional Christmas/January sale period may underperform against budget. This, combined with the uplift on VAT and an increase to business rates for certain retailers, could lead to continuing retail insolvencies in 2010.
KPMG recently commissioned research into how companies are managing cash in the recession. The findings showed that companies are focussed on cash preservation but they are pessimistic about the future – no surprises there, then.
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 in the difficult weeks ahead. Our research shows that many companies are still struggling to get a tight hold on cash in the business, and in retail this is particularly critical.
Cashflow forecasting continues to be a challenge with few companies hitting targets despite an increased focus on short term forecasting methods. Failure to establish clear visibility of cash requirements is often a driver of companies getting into financial distress.
Perhaps the most concerning findings show how companies across all industries 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 there will be negative implications for corporate health if such a large percentage of companies are tightening credit lines and negotiating payment terms. Indeed, the knock-on effects of drastic capital expenditure threatens overall economic recovery.
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, credit insurers and 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 five 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.
Also, despite the increased focus on cash in the current environment, many companies are still failing to explore all opportunities for cash generation. The research demonstrated that improvement programs typically focus on operating working capital, treasury and capital expenditure. Few companies are seeking improvements from indirect tax and duty, property and pensions, all of which could provide much needed cash flow. Tax is one of the biggest cash flow items for many companies and a review of operating processes could yield significant results.
It remains to be seen is whether the retail industry as a whole has been successful at embedding cash more into the operating culture. When the economy eventually recovers it will be clear how many companies have achieved sustainable improvement in their working capital – those that don’t might not be here to tell the tale!
