News Category: Start-ups
A number of recent reports out this week have highlighted that an increasing number of firms are getting into cash flow difficulties as a result of the economic downturn. It is becoming more more difficult to refinance the company that is in financial difficulties. Many companies are discussions with lenders to use the terms of existing agreements. Banks are tightening up on the ' headroom' earnings linked targets, associated with a company's ability to repay debt. According to recent research undertaken by Deloitte this has reduced by one third this year. These banks ' covenant' targets are made up of financial ratios that reflect a measure of a company's ability to repay a business debt. A recent examples is Barratt, the home builder, who struggled to be renegotiate their finances in light of the fight he is focused on covenants. Banks appeared to concentrating on the size of business loans, as well as the commercial terms of repayment. This is putting pressure on companies to manage cash flow more effectively.
A monthly 'business baromter' report by Lloyds TSB highlighted a few days ago that the trading prospects of future dropped to their lowest level in survey history. In addition, pressure from mounting costs is destroying business optimism and is expected to last well into 2009. Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said: “British businesses are already being squeezed by the rising cost of raw materials and weakening export prospects in the slowing European market, despite a weaker pound. These pressures, together with the bleak outlook for domestic growth, are taking an inevitable toll on firms’ confidence in their own ability to do business".
One of the impacts of the general cash squeeze has been a drop in the level of business investment by 1.9% in Q2 compared to Q1, as businesses poured cash to whether the oncoming storm. This drop in investment is is reflected in the fall in the productivity of UK businesses. The office of National statistics revealed today that factoring fell by 7.3% in the second quarter compared to the same time last year. Recent research by the British Chambers of commerce also forecasts that as a result of contraction and business investment reduction that UK unemployment would rise to over 2 million people as businesses tightened their belts. This assertion is supported by Lloydtsb's recent 'consumer barometer', that found that consumer expect household and interest rates to rise over the coming months. Trevor Williams, chief economist, Lloyds TSB Corporate Markets, said; “The survey shows that consumers are bracing themselves for the worst when it comes to the squeeze on the household purse. Should the Monetary Policy Committee (MPC) be forced to increase rates over the months ahead, then at least this will come as no surprise to consumers and limit any negative reaction.”. The latest MPC minutes reveal that they expect GDP to contract in Q3 2008. This is despite rising inflation pressures, and they therefore decided the keep rates on hold at 5%.
The reaction of business has been to attempt to conserve cash. By cutting back on their expenditure on investments and staff, small firms are reinforcing their balance sheet by ensuring cash is in the bank for the bad times to come. The bi-annual Lloyds TSB business conference report reported that of 1600 firms surveyed, cash flow problems were now at their highest level in nine years. The main causes of cash flow will have been late customer payment, reduction in overdraft facilities and reducing sales through lack of consumer confidence. The report highlighted that almost a quarter of firms were now reporting cash-flow problems although this is not on par with historical levels during previous recessions.