Cash generation of businesses in the Thames Valley has stayed worryingly low heading into the cash crunch triggered by the COVID-19 pandemic, shows a new study by accountancy and business advisory firm, BDO LLP.
BDO’s analysis of UK businesses shows that those in the Thames Valley converted just 2.9% of the value of their sales into free cashflow on average last year*. The average for businesses in the Thames Valley has stayed stubbornly low after falling from an average of 3.7% just four years ago, prior to the EU referendum.
Businesses in Berkshire lead the way with 3.2% of sales converted to cash, followed by Buckinghamshire (3%) and Oxfordshire (2.8%), with the major tech businesses in Berkshire playing a key role in driving up cash generation.
The firm says that many Thames Valley businesses have faced major cashflow challenges since the start of the pandemic. The effects of lockdown on sales and the rise in unpaid invoices have seen cashflow dry up for businesses. These pressures come on top of the pressure on farm produce prices for the regions’ agricultural industry over recent years**.
However, the diversity of the region’s economy should insulate the Thames Valley from COVID-19 more than some other parts of the UK. In particular, the M4 corridor’s long-established cluster of tech businesses should continue to act as a driver of cash generation in the future.
Miles Boorman, head of business services & outsourcing at BDO, said: “Our region’s balanced economy does give us confidence that we can bounce back quickly, however. Both the M4 corridor’s tech hub and our agricultural industry 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 the Thames Valley.
“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 cashflow, improving that, in these conditions, is harder but achievable.”
Free cashflow 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 5% of the value of its sales to free cashflow 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; 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.
Boorman 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 cashflow. 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.”
* Accounts filed during the year ending 31 March 2020