Cash is king in these difficult times, so what are retailers doing to ensure they have the money to run their business day to day? Joanna Perry reports
As cheap credit has dried up retailers have had to go back to basics when managing their cash flow.
Not having enough money available to pay for day-to-day costs constrains a business’s ability to operate, but too much cash floating around could mean that the business is not maximising sales and profit opportunities.
So what are retailers doing to maintain the liquidity that is essential in a retail business?
At the National Retail Federation conference in New York earlier this year, Kingfisher group chief executive Ian Cheshire highlighted that borrowing from banks has become relatively expensive, and so optimising how you use the cash available in your business is crucial.
Cheshire urged retailers to stay away from the banks and use working capital instead of borrowing. He added that many retailers rarely look at how
much money is tied up to produce their profits. Stores can be too beautiful, or too much money is locked up in stock. Cheshire is adamant that cash flow and debt matter.
As part of the seven-step programme Kingfisher is running to deliver shareholder value - which Cheshire has been the driving force behind - he wants to reduce the amount of working capital from the £500m that it was. The long-term ambition is to get this figure to zero.
In 2008/09 Kingfisher surpassed its target to reduce working capital by £100m, delivering a £180m reduction. During this time B&Q reduced its stock pool by £115m in the UK.
In the first half of its 2009/10 financial year Kingfisher cut the average number of days’ stock it was keeping by eight days. B&Q cut its stock days by nine days while availability reached record levels.
Kingfisher has increased payment terms on its direct-sourced products by 20 days, something on which it has made further progress with in the second half of the year.
The retailer expects to reduce working capital by a further £50m during the 2009/10 financial year, despite changes in French law shortening payment terms in that country.
Cheshire said that this change in working capital requires a change in mindset. And stores that were once piled high with stock can benefit from a reduction in more ways than just the obvious cash flow improvement.
At B&Q shrinkage has fallen, hours are down and he says that customers thought the lights had been turned on as a result of product not being piled up to the ceilings in stores.
A cash crisis?
Morrisons finance director Richard Pennycook says that several retailers have struggled in the past few years because of cash flow problems.
Investment analysts and other retail watchers tend not to look on cash flow as a primary concern. However, Pennycook points out: “They are mainly interested in the top and bottom line until a retailer has a problem.”
It’s only at that point the balance sheet begins to be examined much more closely.
For instance Woolworths and Kwik Save both lost the confidence of their creditors to pay their bills.
House of Fraser has asked its lenders to renegotiate its banking covenants in order to enable it to continue expanding. It has tightly held covenant restrictions on its “cash cover”, which it is thought it wants loosened so it has more headroom to further develop own-brands and expand internationally.
Suits You was the latest retailer to win backing for a CVA last week and it is tackling its cash flow problems by cutting outgoings on rent. Landlords of the 42 stores that the chain wants to dispose of in the longer term have agreed to accept 60% of the full rent for 18 months - equivalent to 11 months’ rent - during which time the stores will continue trading.
Lee Manning, partner in Deloitte’s reorganisation services division, says: “Cash is oxygen to your business. You need it to function unless you surround yourself with interminable credit. And not soft currency but cash flow - money you can use to pay for things.”
Manning says that very few retailers can generate cash by simply putting up their prices, so they have to use other tactics to generate money that can be used for things like buying product and improving stores. He notes that retail payment cycles are also lumpy with things like quarterly rents, wages and VAT bills.
“If you can’t borrow it then you have to look at if you are holding too much stock, and tying up money in stock that isn’t turning back into cash,” says Manning. He explains that this sometimes necessitates selling stock at a discount just to free up cash.
Pennycook says that trade credit insurance is absolutely fundamental to managing cash flow, as if suppliers won’t extend credit then retailers can end up having to pay upfront for stock. So he says that retailers should consider credit insurers as just as important as the banks when it comes to how they manage cash flow.
Without good credit lines retailers can struggle to trade. This is what happened to Kwik Save, which struggled to get hold of product to stock its shelves with before falling into administration in 2007.
Pennycook says: “For a retailer a lot of it is about stock and how quickly we pay suppliers.”
He explains further: “The supplier provides the retailer with product and [the retailer] doesn’t pay for it until three or four weeks after they have been paid [by the customer] - this creates negative working capital. The harder you can work that the less cash you need.”
Particularly in the supply chain retailers need to “be very efficient” in terms of working capital usage. Pennycook says that retailers need to benchmark themselves against their competitors in this area, as if they are better at this than you then your business is at a real disadvantage.
For instance, Morrisons’ strong balance sheet has allowed it to create a return from actually shortening the time it takes to pay suppliers. Pennycook explains: “As we have had a strong balance sheet, we have been able to help suppliers by accelerating payments and they have given us improvements [in terms] in return.”
Manning points out that “retailers thrive on turnover of inventory”. Each time stock is turned it frees up the cash to buy more. The more times you can turn your inventory at a profit in any given period the more you will earn.
For grocers, stock turn is quite quick due to the perishable nature of much of the product, but even here there are benefits to improving it further. Pennycook explains that one of the things Morrisons is targeting with its systems replacement is improvements in this area. “We are putting in new
systems that we think will improve stock turn. But grocery retail is closer to being just in time than others. Some of our bigger stores have six or seven deliveries a day.”
If you have stock that you can’t get rid of then discounting might become essential to turn product back into cash. However, Manning warns that generating cash at the expense of profit can’t go on forever.
And he also says retailers need to be careful what they spend money on generated by squeezing their suppliers.
“If you are opening stores you shouldn’t do so by not paying your suppliers. You should use shareholder funds to pay for capital expenditure,” he warns.
Or you can look at alternative business models. “Another way you can do it, if you are expanding but cash constrained, is to do it through a concession arrangement where your landlord essentially gets payment by results.”
And a more major measure you can take if you are very financially constrained is to do a CVA. Manning says that this amounts to asking your creditors to help fund your business.
For many businesses a combination of these tactics will be necessary to maintain liquidity.
Manning concludes: “Working capital management is a combination of short-, medium- and long-term techniques.”