A blueprint for British business - Part one: cash management and liquidity
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May 31 2012
A blueprint for
British business
Part one: cash management and liquidity
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www.f t . c o m / b l u e p r i n t
2 FINANCIAL TIMES THURSDAY MAY 31 2012 FINANCIAL TIMES THURSDAY MAY 31 2012 3
BLUEPRINT FOR BRITISH BUSINESS | OVERVIEW BLUEPRINT FOR BRITISH BUSINESS | CASE STUDY
Contents
Access denied
UK companies are sitting on £754bn in currency and deposits, as they hold back on investment decisions, writes Brian Groom
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2 OVERVIEW OLITICIANS AND Several large FTSE companies, including Glaxo- share from rivals, provided they do so wisely. Philip Booth, editorial director at the Institute
British companies are hoarding cash as they
wait and see what happens in the economy
economists have been pressing
companies to start spending
SmithKline and AstraZeneca, the pharmaceutical
groups, and BP, the energy company, have denied
Some are investing with the help of the gov-
ernment’s £2.4bn Regional Growth Fund, such as
of Economic Affairs, says: “If I were a share-
holder I would be asking directors why they
Case study Center Parcs
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4 COST-CUTTING their cash piles, so an upturn they are sitting unnecessarily on cash piles. Darchem, an engineering business based at Still- were sitting on cash that they could return to
Making savings can generate revenue and in business investment BP says it is investing more in the UK now ington, near Stockton-on-Tees. It is awaiting con- shareholders – why are we not paying dividends? ARTIN DALBY, CHIEF
even fund growth reported in provisional data for than in recent years, with £4bn committed to firmation from its US parent of an £8m invest- It’s not a company’s job to sit on piles of cash.” executive of Center Parcs, needs
6 CASH FLOW the first quarter has come as a various offshore projects over the next five years. ment to create production facilities for specialist He agrees, however, that it is rational for com- no reminding of the value of
In an era of austerity, a strong balance welcome relief for those who Carmakers have pledged substantial invest- fabrication for the new-build nuclear market, panies, particularly smaller ones, to build up investment.
sheet is vital manage companies’ capital. ment, helped by demand in emerging markets towards which the fund has offered £1m. cash piles for future investment because of fear “One of the reasons we have
7 SMALLER COMPANIES According to the UK’s Office for National and a flexible workforce. General Motors’ £125m Graham Payne, managing director, admits that higher capital requirements on banks will been successful for the past 25 years is we are
Entrepreneurial businesses need Statistics, business investment – which had fallen investment in its new Astra at Ellesmere Port on uncertainty over the government’s nuclear power make it even harder to get credit. forever reinvesting the profits and refreshing
banking support sharply during the 2008-09 recession – rose by 3.6 Merseyside comes on top of £4bn of commitments station plans is a “big worry”, but says the Prof Booth calls for microeconomic measures the product,” he says.
8 CURRENCIES per cent in the three months to March compared from Jaguar Land Rover, Ford, BMW, Bentley proposed investment is not a risk. Darchem to help companies, particularly by further radical The holiday operator has begun construction
Financial instruments can be used as a with the previous quarter, and by 14.2 per cent and Toyota. does other nuclear work including insulation deregulation of the labour market and relieving on a £250m village – the company’s fifth – on
hedge against a strong pound compared with a year ago. InterContinental Hotels, Subway, McDonald’s, and could use the plant for aerospace manufac- companies of the impending burden of auto-enrol- the Duke of Bedford’s Woburn estate, north of
10 MANUFACTURING It remains, however, more than 9 per cent Starbucks and Marston’s are among leisure turing, too. ment of their staff in pension schemes such as London, buoyed by strong trading and a 97 per
Companies can no longer rely on bank below where it was in early 2008. With the UK chains planning expansions that will create thou- Two-thirds of its work is in aerospace, but Mr the National Employment Savings Trust, the low- cent occupancy rate at its four existing sites.
lending – but are coping surprisingly well economy in a double-dip recession and fresh sands of jobs. National Grid aims to spend £31bn Payne says the nuclear sector will be “one of the cost scheme created by the government. This was no sudden decision. Mr Dalby first
11 OPINION instability in the eurozone, companies are bound by 2021 upgrading Britain’s gas most fundamental parts of our future growth in Strategists say that even if the eurozone walked through the greenbelt forest site eight
Jonathan Guthrie on UK plc’s doomed to remain nervous about investment. and electricity networks. the next five to 10 years”. crisis provokes a renewed economic downturn, years ago. A battle against local opponents
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golden age Businesses have been rebuilding their balance Companies that invest companies should have an eye to opportunities ensued before planning permission was granted
sheets, which, in many cases, were over-geared when others do not can ANY COMPANIES, THOUGH, as well as simply cutting costs. Research by PA in September 2007, after initial rejection.
before the financial crisis. UK companies, prime themselves for have been holding back on invest- Consulting Group suggests that, in the recession Since then, the company has been diverting
excluding banks and financial institutions, have future expansion and ment decisions until they see of 2008-09, companies that saw the crisis as an footpaths and bridleways and building new
CONTRIBUTORS amassed £754bn in currency and deposits, equiva- steal market more light at the end of the tun- opportunity to acquire assets cheaply or win roundabouts. It also took a year to put together
BRIAN GROOM is the FT’s business and lent to 50 per cent of gross domestic product, nel. “Are they being cautious? market share from weakened rivals achieved a finance, of which £100m will come from Black-
employment editor according to official figures. Not all of that may Yes. Are they being irrational? Probably not,” 10 per cent higher total shareholder return than stone, the group’s private equity owner, and
JONATHAN GUTHRIE is the FT’s City be available for investment in Britain – the big- says Lee Hopley, chief economist at EEF, the those that did not. £150m in a construction loan from RBS,
editor gest growth is in deposits held with foreign manufacturers’ organisation. Mark Thomas, business strategy expert at PA, Barclays, HSBC and Lloyds Banking Group.
MICHAEL HUNTER is an FT markets banks – but few doubt balance sheets are Richard Jeffrey, chief investment officer at believes companies are poorly prepared for the Unlike some companies, Center Parcs did not
reporter strong. Yet many companies have been Cazenove Capital Management, says the rebuild- consequences of a Greek exit from the euro. “It have a cash pile. The trigger for the Woburn
MICHAEL KAVANAGH is an FT companies unsure about when to start spending ing of balance sheets is a hangover from the funding was refinancing of its £1bn debt, which
reporter amid uncertain prospects. credit crisis, when companies conserved cash had been due to expire next year. It has been
JONATHAN MOULES is the FT’s enterprise “Business will always pause on because they feared they would be denied access ‘Until companies stop stashing replaced by a bond issued via a “whole business
correspondent investment if it thinks it is not to credit. “This is where they want their balance securitisation” backed by revenue from its
PAUL SOLMAN is a freelance journalist going to get a return because the sheets to be,” he says. “They want to have more the cash, the economy will existing villages in Cumbria, Nottinghamshire,
JESSICA TWENTYMAN is a freelance moment is wrong, because there liquid assets; they want more cash because that Suffolk and Wiltshire.
journalist isn’t enough consumer and is what provides them with reassurance.” remain on the critical list’ The Woburn Forest site, due to open in
customer demand,” says John He hopes to see “more significant growth” in spring 2014, will employ 1,200 people in the
ILLUSTRATIONS Cridland, director-general of the investment over the next two years than in 2011, is a difficult business to plan for, but I think you construction stage and 1,500 once it opens.
Nick Lowndes CBI, the employers’ group. when it grew by just 1.2 per cent, but warns need to do some planning – maybe a central Mr Dalby has little doubt that there will be
Peter Spencer, chief eco- that when companies spend, they may be scenario where things are not so disorderly, and sufficient demand even if economic growth
nomic adviser to the Ernst tempted to invest in higher-growth economies also an extreme one.” remains slow.
& Young Item Club, the non- rather than in the UK. With or without a eurozone apocalypse, some Center Parcs, which attracts families, has so
Special reports editor Michael Skapinker governmental forecasting Mr Jeffrey says that when investment comes, companies see clear virtues in investment even far seemed recession-proof: if money is tight,
Editor Hugo Greenhalgh group, says the UK will not some companies may be doing it from a position in difficult times. “We have been investing while many trade down to the short-break holidays at
Commissioning editor Robert Orr begin to prosper until these of weakness. “It will be interesting to see what others have been tightening their belts,” says which it excels.
Production editor Jearelle Wolhuter funds are put back into Tesco [the supermarket group] does, for instance. Majid Hussain, managing director of Accrol
Sub-editor Camilla Imperiali the economy. “Until these I suspect that when they decide what their future Papers, a maker of kitchen and toilet rolls, based
Picture editor Michael Crabtree companies stop stashing is going to be, it will require some investment.” in Blackburn, Lancashire. Center Parcs,
Art director Derek Westwood the cash and start He also warns that if companies hang on to After spending £25m on machines and buildings
Commercial director, Emea Dominic Good increasing levels of their cash piles for too long, the government may since 2005, allowing it to make high-quality paper which attracts
Head of solutions Patrick Collins investment and divi- try to take them away. “If companies continue to more cheaply, Accrol plans a further £30m invest-
Head of project delivery Rachel Harris dends, the economy grow their share of national income, there is ment in the next two years. Mr Hussain adds: families, has so
Integrated solutions manager Alexis Jarman will remain on the going to be a temptation for government – not “Perhaps it’s a bit high risk to be investing in a
Advertising Peter Cammidge critical list,” he warned just ours but governments in general – to say we recession period, but for us it’s been paying off.” far seemed
last month. should be taxing these companies more heavily.” Additional reporting by Chris Tighe
recession-proof
All editorial content in this special report is produced
by the FT. Our advertisers have no influence over, or Mr Dalby expects the investment to add 20
prior sight of, the articles or online material.
per cent to Center Parcs’ turnover and 25 per
cent to its profits. In the year to April 2011, it
had earnings before tax, depreciation and amor-
tisation of £131m on revenues of £290.5m.
Online This will probably be its last site in the UK,
where it views its geographical coverage as
Contrasting approaches complete.
Ireland remains a strong candidate for
to capital management at expansion abroad, though Center Parcs ended
talks with the government in Dublin two years
two Manchester-based ago after the recession hit. In the long term,
Center Parcs is eyeing markets such as India
companies, James and China.
In the six years since Blackstone bought
Halstead and Findel, Center Parcs, it has spent more than £250m
upgrading the existing villages and will spend
show the importance for a further £60m over the next three years.
Mr Dalby says 60 per cent of customers come
companies of keeping a back every three years, so it is important to
attract them with well-maintained facilities
handle on their finances. and new restaurants and leisure attractions.
Brian Groom
ft.com/blueprint
4 FINANCIAL TIMES THURSDAY MAY 31 2012 FINANCIAL TIMES THURSDAY MAY 31 2012 5
BLUEPRINT FOR BRITISH BUSINESS | COST CONTROL
Cutting back to the bottom line
Reduction in expenditure can generate cash f low, and even finance growth, finds Jessica Twentyman
O
PTIMISTIC, YET STILL
defensive: those are the
sentiments expressed by UK
finance chiefs in manage-
ment consultancy Deloitte’s
CFO Survey for the first
quarter of 2012.
In the first three months of
this year, optimism among chief financial officers
about the prospects for their own businesses saw
its sharpest rise since the quarterly survey began
in 2007 – but that has not yet translated into
more expansionary strategies, such as increased
capital spend, mergers and acquisitions or intro-
duction of new products and services.
Instead, the survey shows that British chief
financial officers are even more focused on safe-
guarding strategies, including cost-reduction pro-
grammes, than they were a year ago. Thirty-eight
per cent of 136 surveyed indicated that cutting
costs is a top priority for 2012, compared with
the 31 per cent in last year’s survey.
Ian Stewart, chief economist at Deloitte, is
aware of the apparent anomaly of more buoyant
business sentiment and still-cautious corporate
strategies. “What we’re seeing is that concern
over external uncertainty remains high,” he says.
“The consequence of that concern is that the
‘new normal’ in terms of corporate behaviour is
not to anticipate any kind of steady upturn in
the near future, but instead to prepare for erratic
growth for some time to come.”
For now, though, the cuts continue. For
example, Mothercare, the baby products retailer,
has reduced its number of UK stores by 62 over
the past 12 months, and, in April, announced
plans to shut a further 111 by March 2015, result-
ing in about 730 job losses. It is also seeking to
slash its “non-store overhead costs” by £20m on
an annualised basis by March 2015, with the loss
of 98 jobs at its UK head office in Watford.
In the financial services sector, meanwhile,
HSBC has recently announced that its three-year
turnround plan is on target and that it cut costs What can British businesses do to make their second site, but that warehouse was costing us
by £2bn during the first year of this plan. In the cost-reduction strategies more successful? £1m a year to run and was full of unsold inven-
coming months, it expects to shed 2,217 jobs from “Ideally, cost-cutting should be a long-term tory. My logic was to get rid of the property first
its UK workforce. strategy,” says Clive Lewis, head of enterprise at and then the inventory problem would solve
But cost-cutting should not just be a response the Institute of Chartered Accountants in itself. Now, turnover has increased, as has our
to difficult market conditions. For some compa- England and Wales. stock turn rate and I’m saving money that I
nies, it is simply the way they do business, However, he acknowledged, some companies would have otherwise spent on rent and interest
regardless of the external environment. had no choice but to cut costs to improve short- on stock,” he says. “It was a structural cost
“A low-cost position wins in nearly every term cash flow. “Up to 5 per cent of firms are saving, not a tactical quick win. This is where
industry,” notes a recent report from Bain, the trading at a loss and more are heading that way,” I think cost-reduction efforts should focus.”
consultants. “Cost leaders can out-invest rivals in he says, and cutting costs now could help them At Cheshire-based Oliver Valves, which manu-
areas such as research and development and rectify the situation – but only if they make factures valves used by companies in the oil and
marketing, while still maintaining attractive reductions in ways that will not impair the busi- gas industry including Shell, BP and Exxon,
margins. They have the resources to capitalise ness’s ability to expand in the future. That means chairman Michael Oliver expects cost control to
faster and more readily on new opportunities. identifying areas where cuts will not compromise be a top priority for his procurement team, just
They can capture share, because they have more a company’s unique selling points: its specialist as it was for him when he started the company
price flexibility.” skills, for example, or the quality of its products. in his garage back in 1979.
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But many cost-reduction efforts continue to fall In their negotiations with UK-based steel suppli-
short of their goals, and relatively few companies ANY ORGANISATIONS ers, they offer the companies guaranteed orders
succeed in making the savings they do achieve choose to start this process by for the coming year, but on three conditions: the
stick, the report adds. A Bain survey of almost reviewing areas of discretionary suppliers must keep the steel on their own site
300 executives showed that cost-reduction initia- spending, including marketing until it is needed at Oliver Valves; they must
tives launched in 2008 and 2009 in response to and training budgets. But at ensure that it is pre-certified for quality by inde-
the downturn had reaped disappointing results. Briggs Equipment UK, the Staffordshire-based pendent assessors; and they must offer discounts
Forty per cent of respondents at companies that forklift company, chief executive Richard Close to Oliver Valves that reflect the volumes the
aimed to reduce costs by at least 10 per cent takes issue with this approach. “It is a very company orders.
acknowledged that the target was not reached. short-term response,” he says. “You will proba- The company also works with a wide pool of
At companies aiming for ambitious reductions of bly save money, certainly, but you are just international suppliers. It has a procurement
20 per cent or more, 60 per cent of respondents avoiding the more painful decision to plan a team in India that deals directly with local
admitted failure. serious restructuring that would deliver more suppliers, regularly achieving 30 per cent cost
sustainable savings.” savings on components compared with the prices
In 2006, Mr Close was brought in to turn the offered by UK suppliers.
company around, and, by 2011, profits had risen “We know to the penny what our costs are –
‘Gross margin is king – if you to £3m, up from £300,000 in 2010. In part, that and I mean to the penny,” says Mr Oliver. “We
recovery has been achieved through cost-cutting, have a saying here that ‘gross margin is king’, so
do not understand your costs he says, and in particular, the 2010 closure of a we simply don’t accept an order in the first place
warehouse relatively far from the company’s if it doesn’t offer us a gross margin of at least 50
really thoroughly, you are not main premises. per cent. If you don’t understand your costs
“I hit an amazing wall of resistance within the really thoroughly, you’re not running your busi-
running your business well’ company when I announced the plans to sell this ness well. It’s as simple as that.”
6 FINANCIAL TIMES THURSDAY MAY 31 2012 FINANCIAL TIMES THURSDAY MAY 31 2012 7
BLUEPRINT FOR BRITISH BUSINESS | CASH FLOW BLUEPRINT FOR BRITISH BUSINESS | SMALLER COMPANIES
Show me the money A capital idea
In an era of austerity, a strong balance sheet is vital, says Paul Solman Start-ups need banking support, writes Jonathan Moules
W F
HEN THE DOWN- companies have raised it on their priority list. OR MOST ENTREPRENEUR- from time to time and the debt should not be
turn struck, Booths “But businesses need to remember that there is led businesses, capital manage- permanently bumping up against the facility.”
was better prepared a whole range of finance options. Term loans and ment is one problem they He says small businesses are generally not
than many busi- overdrafts are still very popular. But they should would actually like to have. very good at managing banking relationships.
nesses in the UK. also consider options such as asset finance, hire Young businesses do not gen- “The banks and the businesses are divided by a
The family-owned purchase and leasing, invoice discounting and, erally have huge cash piles. common language. Entrepreneurs talk vision
grocery chain, for some, equity.” The first few years is usually a and the future. Bankers talk cash and now.”
which operates 28 Mr Lewis adds: “It boils down to basic, good hand-to-mouth existence, saving Reliance Fibres, a London-based paper recy-
stores in the north-west of England, has financial management. And you need to talk money wherever possible and spending what- cling business, trades in seven countries, but
been part of the retail landscape since 1847 about it regularly in board meetings and ever money is available building operations. gets almost all of its £12m annual revenue from
and has seen its share of peaks and troughs make sure you have a high standard of financial Those that survive can start to think about exports to India. As a result, it needs currency
in the economic cycle. forecasting.” selecting a finance team to take charge of their hedging support and a large amount of working
The fallout from the credit crisis of 2008 was Ms White at Bank of America Merrill Lynch capital management. However, most manage capital to buy stock. It also needs to ensure
not immediately noticeable in Booths’ business says companies are also reorganising their inter- without a finance director, instead relying on that invoices are settled quickly and that
fortunes, says John Vandermeer, finance director. nal processes, supported by systems to improve financial controllers or even book-keepers. suppliers are paid on time.
“People still appeared to have money in their their cash flow. “Anybody who had a crystal ball The financial crisis created a double blow for Good banking support is essential, as is a
pockets, especially as our customers tend to be in 2007-08 would probably have renegotiated their many entrepreneurial businesses – not only did diligent finance director, according to Pankaj
among the more affluent,” he says. “It’s really in finance conditions before the crisis, even they have to cope with the implications of a Chowdhary, founder and chief executive. “For
the past 12 months that we’ve begun to see if they weren’t up for renewal,” she sudden drop in demand for their product or us, managing cash is all about rolling it as
some impact. Unemployment and fuel costs says. “But treasurers also need to service but the credit to support their opera- soon as you can,” he explains. “One thing we
have begun to affect spending habits.” make sure they are looking at tions became harder to come by. make sure of is that we don’t pay anybody up
Booths was fortunate last year, too, all aspects of their business Stats Group, an Aberdeen-based engineering front. We squeeze as much as we can out of
when it sought refinancing to help impacting working capital business that provides tools for oil and gas com- our credit limit with suppliers and get as much
fund expansion. “The banks have management, including supply panies to isolate sections of their pipelines for finance as possible from our buyers.”
always seemed to have an appetite chain and inventory, to testing, had been growing between 50 and 100 Reliance buys its raw materials from large
for what we’re trying to achieve,” ensure that cash is per cent in the four years leading up to the col- waste management companies, many of them
Mr Vandermeer continues, “although managed properly. lapse of Lehman Brothers in September 2008. In family-owned businesses that are careful about
our original bank did suggest we bring “Whether you are a the next year, however, its revenue fell from whom they deal with. As a result, Reliance has
some others on board.” medium-sized corporate or a £16m to £9m, forcing it to cut its headcount had to make sure its reputation is exemplary.
Other British companies, however, have large multinational, there is a lot from about 140 people to 80. Being UK-based helps in this regard, Mr Chowd-
enjoyed less success when they went to the of emphasis on how to be more Although its oil market quickly recovered, hary notes. It also helps that the business
bank. The total value of loans to private, non- efficient when it comes to cash-flow Stats, which up until then had been wholly debt banks with HSBC, which has made Reliance
financial companies dropped by £1.7bn in management, and understanding the profit and funded, faced problems getting the working cap- one of the small businesses it promotes. “Repu-
March, according to the Bank of England, and loss impact of the supply chain,” she says. ital it needed to rebuild its capacity. tation is first and foremost for us,” he says.
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overall lending to businesses is falling by more “This could mean negotiating better terms with “The reality was that it was an awful rock
than 3 per cent a year. suppliers. Sometimes just moving payment bottom that led us to be very constrained,” HILE ACCESS TO FINANCE
For many businesses, credit has all but dried methods from paper to electronic will make a Peter Duguid, Stats’ chief executive recalls. “We remains a struggle for many
up in the years since the financial crisis, forcing difference, or moving to other available instru- had to reassess our levels of debt. Certainly, entrepreneurial businesses,
them to rethink how to manage their cash flow ments, such as direct debits.” from an entrepreneurial perspective, my focus alternatives have appeared to
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and liquidity – or perish. on the day-to-day management of cash was enable companies to bypass the
“If you go back to the pre-crisis period, you OMPANIES ALSO NEED TO front and centre.” banks. Some companies, such as men’s toilet-
wouldn’t see businesses placing the amount of consider whether their cash pile is Stats recovered its position, rebuilding its ries business King of Shaves and confectionery
emphasis on cash flow and working capital being put to best use. Jose Franco, workforce to previous levels and returning to business Hotel Chocolat, have turned to cus-
management that they are now,” says Lesley global head of corporate banking liquid- strong top-line growth. Revenue this year is tomers for funding via retail bonds.
White, head of Europe, Middle East and Asia ity at Bank of America Merrill Lynch, expected to be £25m, up from £14m in 2011. The digital age has also created a variety of
treasury products for corporates at Bank of says: “With all the uncertainty in the market, a However, it has not been easy, Mr Duguid says: new business models and technologies that can
America Merrill Lynch. ‘fortress balance sheet’ is vital. But there is the “When you are a niche engineering business help them in this process, such as peer-to-peer
“Post-crisis, with bank lending much tighter, threat that it will be eaten up by inflation due to you need very specialist design experts, so when lending and short-term loans available at the
the importance of effective, efficient cash-flow the low [interest] rate environment.” you let some of those go, it is quite detrimental swipe of a smartphone screen.
management has increased. Cash flow is the life This is why an effective cash-flow management to the business.” According to Tony Cohen, head of entrepre-
blood of the business.” strategy also involves investment. “Cash flow In March this year, Stats accepted a £7.8m neurial business at Deloitte, the accountancy
There are signs that companies – especially in and investment strategy go hand in hand investment from the Business Growth Fund, a firm, the danger for many young growing
the UK – are adapting to this reality. According because the stockpile of cash causes other bank-financed venture capital fund. The rela- businesses is that they get too caught up in the
to Treasury Strategies, a financial consultancy, challenges,” says Mr Franco. tionship has already short-term requirements
UK-based companies have been building larger “Cash can be classified as operating cash, produced results, with of credit control and so
piles of cash than their counterparts in the US which is needed immediately; reserve, which is the BGF helping Stats ‘Banks and businesses miss out on funding
and eurozone since well before the credit crunch needed in a 6-12 month window; and strategic, find a non-executive opportunities that could
began. Cash held by British companies amounted which isn’t needed so can be invested for the chairman and finance are divided by a increase their cash
to 50 per cent of the UK’s gross domestic product longer term. That investment could be in an director to lead the balances.
at the end of 2011, compared with 26 per cent in instrument or it could be in purchasing one of finance team. common language’ “There is lots of work
2000, Treasury Strategies says. your suppliers, or even a similar business in It is this support, as around creditor terms,
By contrast, US corporate cash was another geography. But the critical point is that much as the funding, that has made the rela- cash collection and cash flow, but they are so
about 14 per cent of GDP at the not all cash should be treated as operating,” tionship with the BGF worthwhile, Mr Duguid focused on what they are doing day-to-day that
end of 2011 compared with 10 he explains. Businesses have been forced to says. “What I see is stronger internal disciplines, they haven’t the time to think more broadly
per cent in 2000, and eurozone Mr Franco adds that the emphasis on effec- stronger accountability in the internal functions about where they might be able to get some
companies’ cash was 21 per tive cash-flow management is likely to remain rethink how to manage their cash of the business and probably stronger banking funds in the future,” he explains.
cent versus 15 per cent. a focus for businesses for the foreseeable relationships,” he says. “I have far better visibil- Larger companies, on the other hand, are
“It could be that UK compa- future. “It wasn’t critical when credit was flow and liquidity – or perish ity [of what is happening in the business] with- inherently better at managing working capital.
nies are generally more con- cheap,” he says, “but risk appetite will also out doing more myself.” They also have significant power over smaller
servative in their approach to become more important in the next five years If there has been a benefit from the financial businesses they buy from or sell to.
cash,” says Monie Lindsey, man- as interest rates rise. The UK and the US are in crisis it is that many entrepreneurial businesses It might seem unfair to those on the receiving
aging director and head of the Lon- a strong position, Europe is challenged.” have been forced to reassess their reliance on end, but it also forces these smaller companies
don office of Treasury Strategies. “But At Booths, Mr Vandermeer says the company’s debt and how they manage available capital. to use their entrepreneurial skills to manage
2008 made refinancing has secured funding for the next Guy Rigby, head of entrepreneurs at account- their cash wisely as well as grow their busi-
everybody more cautious, and whether you call four and a half years. But he says an under- ancy firm Smith & Williamson, says: “There is nesses, according to Julian Ramsey, a director at
it hoarding or insurance, companies don’t want to standing of cash flow is critical to ensure that an old saying: don’t borrow short to invest long. Ernst & Young, the accountancy firm. Smaller
get caught out.” the company does not overextend itself in its In practice this means having both fixed capital businesses should not see themselves as victims.
Nevertheless, banks’ continued reluctance to expansion plans. (also known as equity) and debt in the business.” Being small actually has its advantages, he says.
extend credit is forcing companies to cast their “We have seven or eight stores in the pipeline, The level of debt capacity of a business will “The most successful entrepreneurial busi-
net much wider to secure the cash they need. and there are a lot of factors that will impact depend upon the availability of cash flow to nesses focus on better management of the
Clive Lewis, head of enterprise at the Institute when a new store build will come through,” he service the interest and capital payments, Mr peripheral – rather than the headline – terms
of Chartered Accountants in England and Wales, says. “But a lot of the control is still within our Rigby notes. “Overdrafts, which are repayable relating to cash in contracts,” he says, “less on
says: “There is a general understanding among remit, which helps an awful lot from a cash-flow on demand, should be fully fluctuating. In other whether payment is in 30 or 60 days and more
businesses of the importance of cash flow. Many planning point of view.” words the account should swing into credit on rebates and payment frequencies.”8 FINANCIAL TIMES THURSDAY MAY 31 2012 FINANCIAL TIMES THURSDAY MAY 31 2012 9
BLUEPRINT FOR BRITISH BUSINESS | CURRENCIES
Hedging your bets
Companies can use financial instruments to guard against a strong pound, says Michael Hunter
T
HE PERCEIVED HAVEN prop- “We brought in specialist help to reduce the
erties of sterling on frequency with which we had to revise prices,
international currency as well as to keep down our euro-costs. We
markets generate a clear were not getting a great exchange rate
problem for British business: through the banks, and we also had to pay
a strong pound makes exports transaction costs.
more expensive. “The services offered by our hedging pro-
At a time when domestic vider have been more flexible and
demand is also under pressure from faltering offer us greater clarity. I have
consumer confidence and a return to recession, three forward positions at the
the impact of adverse currency movements on moment, and can look at
competitiveness abroad adds a fresh layer of them at any time. For us,
difficulty. it definitely has worked,
For companies, this makes mitigating the and has also been cost
impact of a strengthening pound all the more effective. If I was
important, and there are four main types of marking our strategy out
financial instruments that can be utilised to of 10, I would give it a
soften the blow. nine, although we remain
Options contracts come in two types. “Call” aware there is an element
options give a company the right, but not the of risk, and the [currency]
obligation, to buy a currency at a predetermined price can always go
price within a defined time frame. A “put” option against us.”
allows the company to sell at a certain price, and One chief executive of
within a defined time frame. a medium-sized company
Futures contracts provide a standardised way based in the south-east of
to buy or sell currency at a set price and a set Britain says that the
time, both defined at the time the contract is pound’s ascent
drawn up. Because the contracts are standard- would need to
ised, they can be subsequently traded on be steeper
exchanges. before it became
Forward contracts work in a similar way, and necessary for his
tend to be drawn up between banks or brokers, business to take
with the price of the sale or purchase also agreed action. He
at the time the contract is written. But because also says
they are private contracts, they cannot be traded that many
among third parties on open exchanges. exporters buy
Carry spot trades allow companies to take long parts or raw
or short bets on the value of a currency, funded materials from
in another, in order to gain positive exposure to abroad, which
a relative change in value that might otherwise can act as what
add to a business’s costs. he termed “an
Michael Stumm, co-founder of Oanda internal hedge”
Corporation, the operator of the fxTrade website, against a strong
offers an example. “You are a small company in pound.
the UK that has an accounts payable of €250,000, Oanda’s Mr
due in three months,” he says. “In order to pro- Stumm points out
tect yourself, you can buy €250,000 using sterling, that some hedging
thereby eliminating any currency exchange risk, strategies are more
since you will be getting today’s rate. It doesn’t complicated than
matter if the euro goes up in value or down as others: “Banks
you are controlling a €250,000 euro position in typically generate
your account thus ensuring you have hedged the
full amount of the pending payable.”
The impact of such strategies on business can
be significant, and the current volatility on ‘With the outlook for the
foreign exchange markets means they are becom-
ing more popular. eurozone still unclear, we expect
Philip Evans, director of strategy and business
development at Ramsden International, a food more clients to use foreign
exporter, is looking into adopting hedges, and
says the currency market is becoming “more exchange platforms for hedging’
influential” as the business grows.
“Historically, we have sold only in sterling.
But customers’ memories tend to only go back a more revenue from selling options than from
year or so, and as we need to avoid looking selling the other instruments used in hedging.
uncompetitive, exchange rates are becoming “Options are relatively complex derivatives,
more of an issue. For some larger customers and unless you fully understand the maths
we now need to invoice in local currencies, behind options pricing, you cannot know if you
but with longer-term contracts, with payment are getting a good deal or not. Hence, we recom-
terms of up to 90 days, you have to evaluate mend clients stay away from options unless they
factors influencing margins, and the volatility have a financial background.”
of the currency market is an important part Angus Campbell, head of market analysis at
of that. It’s not all easily predictable. The London Capital Group, said the demand for the
issue is one of balancing competitiveness hedging services he provides is growing as the
and risk and that has started to move currency markets remain turbulent.
against exporters.” “With the outlook for the eurozone still very
Sarah French, finance manager at unclear, we would expect to see more clients use
IT4Automation, started using currency our foreign exchange platform for hedging pur-
hedging four years ago, after becoming poses. A simple and effective way for exporters
aware that the business, which distributes to mitigate risk is to buy or sell those currencies
networking products, was paying more that they are exposed to in order to protect
than it needed to in euros for products themselves against any adverse fluctuation in the
bought from Taiwan. exchange rate.”10 FINANCIAL TIMES THURSDAY MAY 31 2012 FINANCIAL TIMES THURSDAY MAY 31 2012 11
BLUEPRINT FOR BRITISH BUSINESS | MANUFACTURING BLUEPRINT FOR BRITISH BUSINESS | OPINION
Beyond the bean counters
Companies can no longer rely on bank lending – but are coping surprisingly well. By Michael Kavanagh
W
HILE BRITAIN’S It added: “Most feel that there is currently no ued pressure on the UK high street, the company “The corporate sector is strong in cash, though
political and banking real ‘relationship’ between the banks and their is thriving – it is the banks he is worried about. some are now struggling, while some continue to Jonathan Guthrie A doomed golden age for UK plc
leaders contemplate SME clients. Any relationship, such as it is, is “We are in a strong position. We are a expand,” he says. “If you have an economy that
the extent of the mainly seen as weak or poor, and certainly profitable company with a strong customer is shrinking, the average business is not going
damage that might worse than it was before the credit crunch.” base,” he says. “And shopping groups are, with to expand – it is very difficult to convince people
be inflicted on the Learning to live without lending from one or two exceptions, creditworthy.” to invest if there is no prospect of recovery in
domestic economy by banks appears to be a pattern that has stuck But the general fragility of the UK and the future.”
the eurozone crisis, for many companies, regardless of their credit- European economies has continued to threaten Though Brompton has enjoyed success in
those supplying manufactured goods for sale or worthiness. And, in a reversal of positions, cash- the amount of help many businesses can expect expanding exports, sterling’s recent appreciation
export would do well to keep calm and carry on. rich companies are now concerned about the to receive from clearing banks as the threat of against a weakening euro has forced the com-
W
For Will Butler-Adams, managing director of health of the banks. a double-dip recession looms. pany to impose a mid-year price increase on its
Brompton Bicycle, a stagnation of high street The latest quarterly SME finance monitor “We have a variety of credit lines. We are not range of folding bikes destined for the continent, ALLS OF CASH OFTEN PROVE
spending in the UK and European slowdown has published by BDRC Continental, the consultancy, deciding against doing anything because of a which accounts for about 40 per cent of sales. less durable than the kind made A loans drought
not hindered 20 per cent year-on-year growth in suggested there was an increasing proportion of shortage of cash,” says Mr Mills. “But we have Much of its business is naturally hedged, as the of bricks and mortar. Prudent
sales of its niche range of folding bikes that can medium and smaller businesses who were “happy been diversifying our banking facilities – we are proportion of sales made in the eurozone is businesses build up cash or pay weakens collective
cost more than £800. non-seekers” of bank lending, who had neither nervous and there is safety in numbers.” matched by the proportion of parts priced in down debt when performance has
But the company, one of Britain’s few remain- applied for finance nor wanted or needed to. Instead, the main constraint on trade, he says, euros – just as parts sourced in Asia and priced been strong, lest it disappoints later on. That is economic confidence
ing bicycle manufacturers in a sector dominated “There is a lack of trust in the banks in this is the general lack of confidence in economic in dollars are matched by dollar-pegged receipts. the position of many large businesses as continu-
by east Asian suppliers, is typical of many small market,” confirms Mr Butler-Adams. “There is demand in the UK and continental Europe, And Mr Butler-Adams argues that businesses ing eurozone turbulence – most recently mani- capital expenditure and bolster payouts to share-
businesses that successfully navigated the finan- a very uncertain situation in Europe – we are which accounts for the bulk of the 40 per cent caught by surprise in the last recession are fested in Spain’s property crash – threatens to holders instead. Similarly, no stock analyst ever
cial crisis and subsequent recession of 2009. Like not out of the woods.” of JML’s sales not generated in the UK. better prepared in general to face the next depress growth further. The dissipation of these got fired for short-termism. BT Group, the tele-
many of its small and medium-sized enterprise Concern over the health of banks exposed to phase of difficulties. “Businesses struggling three reserves through cost subsidies during periods of communications company, recently suffered City
(SME) peers, it is pondering investment, but large-scale defaults in Europe has also provoked years ago have gone bust or done something to tougher trading or, indirectly, through bank criticism for raising its final dividend by 12 per
wary of relying on bank borrowing to do so. a defensive financial strategy at JML, the In a reversal of positions, cash- make their situation better. But we have to get deleveraging mean that their impact is rarely as cent. This increment was regarded as derisory
Investment plans for Brompton – which consumer goods distributor. out and export. There is no recovery coming dramatic as suggested by such bald numbers as when a higher total could have been achieved by
include new factory space for expanded produc- More than three years on from the demise of rich companies are concerned from the UK – or Europe.” the $2tn of surplus liquidity reputedly lurking on the simple expedient of spending less on the roll-
tion and a first store in China – are tempered by one of its best-known outlets, Woolworths, JML’s Plans for a new shop in Shanghai reflect the balance sheets of US and European compa- out of faster broadband, a cost that promises to
the desire to maintain a £1m buffer within larger founder John Mills argues that in spite of contin- about the health of the banks booming Asian prospects, and new sales and nies at the end of 2011. benefit both BT and the broader economy.
M
cash balances. distribution leads are being pursued in South European politicians would it were otherwise.
“We have £2.5m in the bank,” Mr Butler- America. Business in the US remains positive. Most of them believe, with varying degrees of ANY BILLIONS OF THE
Adams says. “Four years ago we were operating And even in the flatlining economies of Europe, fundamentalism, that austerity is the only route putative wall of cash have been
in the red – now we want £1m in the bank Brompton’s cult status still leaves the company to post-financial crisis stability and then growth. returned to shareholders. There is
as a minimum against [problems] and if keen to invest in expansion – if paid for out of The implicit contradiction is that many of the plenty more to come. UK listed
the banks don’t lend – and another £1.5m to its own resources. tribunes of the people would nevertheless like companies paid gross dividends of
play with.” For Mr Mills, though, his company’s success in companies to make the stimulatory investments £68bn in 2011, according to Capita Registrars, the
Mr Butler-Adams’ reluctance to rely on bank navigating the “sink or swim” conditions facing seen as inadvisable for the public sector because UK administrator of company share registers.
borrowing even during a phase of expanding many UK mid-tier businesses still leaves Britain of its higher indebtedness. This is a 19.4 per cent increase and the highest
export-led sales growth might appear overly con- facing an economic policy disaster leading to Unsurprisingly, company boards remain scepti- figure for five years and the company’s forecast
servative to many. Surely it is precisely at such high unemployment, stagnant living standards cal that their hurdle rates for investment can be for 2012 is £76bn.
times that businesses ought to be borrowing and a manufacturing decline prompted by a surpassed when spiking yields for Mediterra- Shareholders reasonably expect that a one-off
rather than hoarding cash? defence of sterling. nean government debt point to a long gain by a company should mean a one-off
But such an approach appears to fit a pattern “The real route to re-establishing the scale of period of turbulence and weak payout to them. More broadly, extem-
of fractured trust between the SME sector and investment needed to create a manufacturing growth. For example, the UK’s pore returns of capital are a signal
banks. Created during the crisis of 2008-09, it has renaissance in the UK is a devaluation of ster- Office for Budget Responsibil- that current rates of return.
yet to heal. Now the relationship is threatened ling,” says Mr Mills, who apart from establishing ity, an independent fore- Share buybacks have been a
still further by nervousness over the future his own business is also former Labour finance caster, expects output to sop to investors over the past
willingness and ability of banks to extend credit chief of Camden Council in London. grind along at below 3 couple of years, despite the
as the eurozone crisis deepens. As an importer of many consumer goods per cent a year until reasonable objection that
A report commissioned by the Institute of manufactured in east Asia and denominated 2015. repurchases represent poor
Chartered Accountants for England and Wales in dollars, he is aware that his key policy In a recent note, Mor- value when made, as is cus-
into access to finance for SMEs, published early prescription – effectively the same devaluation gan Stanley, the invest- tomary, during market ral-
last year, concluded the majority of respondents argument some support to revive the Greek ment bank, argues that lies. Buybacks are automat-
felt that “whatever trust existed between banks economy – would hurt the cost base of his own an improvement in the ically earnings enhancing
and SMEs in 2009 has mainly dissipated, due to business in the short term. availability of credit is and tax free for continuing
the ways SMEs have been treated by banks in “But it is what is best for Britain, not JML,” needed to stimulate investors, who are thus
the last nine to 12 months, in particular when he says. “If the exchange rate did go down, we investment even when happy to ignore the critics.
seeking finances”. are experienced enough to overcome this prob- company balance sheets are Takeovers – another use
lem. Life would be difficult but not terminally healthy. A loans drought for corporate cash – have by
damaging – it is what is best for the country.” weakens collective economic contrast been notable for their
confidence, even among those who scarcity. Here, as with investment
do not want to borrow, the argument in organic growth, a heightened percep-
runs. European banks are shrinking their tion of risk is to blame. Meanwhile, private
balance sheets as they write down dud loans and equity companies, reliable purchasers of publicly
seek to meet tougher capital requirements, so no listed companies before the crunch, have suffered
recovery is likely soon. After the decade hubristi- the double indignity of tighter credit and a
cally dubbed “nice” (non-inflationary, constantly boycott by equity funders of the weakest of
expanding) come the years of collective paralysis. their number.
Business has at least benefited from a recovery Raising top-line growth through mergers and
that came in the wake of the credit crunch and acquisitions is a long-standing, if unspoken,
was propelled by such engines as restocking and strategy of chief executives hungry for a pay
unrepeatably rampant Chinese growth. UK corpo- increase. With that avenue blocked, they can at
rate earnings before interest, tax, depreciation least expect the boost to remuneration that
and amortisation as a percentage of sales rose special payouts should deliver via bonus formulae
from 9.9 per cent in 2008 to 15.4 per cent in 2011, shackled to total returns. But, as UK shareholders
but slipped to 13.5 per cent in the last quarter, seize back the ownership that was always theirs
according to the S&P Capital IQ database. The for the taking, bosses can no longer look forward
dread hand of mean reversion weighs heavily on to the upward rebasing of their pay. All in all, for
the shoulder of business. both executives and investors, there is just a hint
For bosses, investment cycles are overlaid by of a doomed golden-age vibe to cash-rich 2012. It
their own career plans. If you are not intending is appropriate that a remake of The Great Gatsby
to stick around – or fear that increasingly asser- will be released this year.
tive investors might provide you with an expe-
dited exit – the temptation is to forget about Jonathan Guthrie is the FT’s City editor12 FINANCIAL TIMES THURSDAY MAY 31 2012
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