Cash management becomes a strategic priority during the recent recession

Effective cash and working capital management has become a key strategic priority during the last 12-18 months according to a major survey of over 300 companies by accountants KPMG.

The detailed report can be found on the KPMG site. Its quite a detailed document - certainly a stretch for most business students - but there are some gold nuggets in there which are really useful for students researching the strategic responses of businesses to the recent recesssion in the UK.

I have summarised some of the key points from the report below:

Key Point 1: External Stakeholders have put great pressure on businesses to improve their cash flow management

This is really important. The main external stakeholders here are the banks. KPMG’s survey suggests that banks have been actively looking for evidence that firms with existing bank debt have explored all the self-help options (i.e. cutting costs, managing stocks better) before granting them additional external funding.). This has created some conflicts between the different objectives and interests of stakeholders. The major focus has been on firms stretching supplier payment terms (higher creditor days) and squeezing customer credit terms (lower debtor days). Banks are the winners here, whereas suppliers and customers may have been the losers from working capital improvement strategies.

The top four reasons given for implementing a working capital improvement strategy during 2009 were:

(1) Pressure from stakeholders (banks, investment analysts, credit rating agencies)
(2) To generate cash which can be used to reduce the level of debt
(3) Because additional debt has been hard or impossible to obtain
(4) To provide finance for acquisitions

KPMG describe a comprehensive project to improve working capital implemented by Vodafone during 2008 and 2009. This identified a “toolkit of almost 100 ideas to improve working capital” which the firm is applying around the global group, which it hopes will generate an extra £300million of cash flow. Impressive stuff.

Key Point 2: Capital expenditure has been cut in order to preserve cash

A good point for students, this one. More companies surveyed by KPMG have turned their attention to slashing capital expenditure projects as a short-term and significant way of preserving cash balances. A substantial proportion (64%) of companies have cut or stopped capital expenditure programmes during 2008/9; and almost two-thirds of firms expect to continue with this lower level of capital spending. Students should straightaway spot the potential conflict here between short-term cash flow improvements versus the loss of long-term gains from investing in capital projects.

Key Point 3: Inventories (Stocks) have been cut - but the process has not been easy

Better management of stocks was a popular and early strategic response by many firms. Short-term measures included:

- Stalling or reducing production for a period (e.g. shorter shifts, fewer shifts, extended holidays)
- Moving to a shorter working week
- Selling price promotions to shift slow-moving stocks

However the KPMG makes an important evaluative point that students should consider. It is relatively easy to reduce stocks - but there are potential implications for productivity and for customer service if production and/or buying processes are changed dramatically.