Updated: Jun 11, 2020
The old saying "cash is king" has significant relevance to every business that is trying to survive the current economic crisis during the Covid-19 lockdown. In this article we present a simple summary of data collected from the financial reports of 1,069 private and public companies in England and Wales, using automated data collection and web scraping technologies to streamline the analytics process in most business intelligence and market intelligence functions.
We've done this to help our clients understand how we can help them accelerate the process of gathering data and analysing evidence to assess where the greatest risks are likely to manifest within their supply chains. Having worked with a number of companies through various crises over the years, our experience tells us that companies that perform well through a crisis are the ones that have clear plans in place to deal with the loss of a strategic customer, supplier, financier or even an investor.
Which sectors entered the crisis with the most amount of cash on their balance sheet to fund operations during the Covid-19 lockdown?
Why are cash balances so important during a time of crisis and high uncertainty?
Cash balances are the most reliable source of evidence in a company's balance sheet. Unlike other assets, cash cannot be manipulated by the art of accounting. Cash is the one source of truth about who has enough reserves to pay operating expenses during times of high uncertainty, downward pressures on sales revenue, and deteriorating cash-flow.
As at the end of April 2020, 307 private and public sector enterprises in our sample of 1,069 companies issued profit warnings. Of these companies, 84 have never issued a profit warning in at least 10 years. This provides a strong indication of just how serious the Covid-19 lockdown is impacting even the best performing companies. In a later article, we’ll be providing evidence concerning the largest declines in sales, profitability and cash-flow relative to operating expenses across each sector. Why is this helpful? It allows you to get an idea of the time horizon for when the weakest businesses in each sector become insolvent.
The banking sector has more than 2 times as much cash as all other sectors combined.
The chart above shows that the banking sector in England and Wales has built up more than double the amount of cash compared to all other sectors combined. The banks entered the lockdown with over GBP £657 billion in cash on their balance sheets, giving them significant liquidity to withstand sustained pressures on their revenues, cash flows, and a rise in credit defaults on loans. The amount of cash they have relative to other sectors provides strong evidence that the regulations imposed on banks following the credit crisis in 2008 provide a good framework for resilience in the banking sector.
Unfortunately, there are some sectors that started the year with fairly strong cash balances but they have suffered significant declines in revenues and cash flows since the lockdown, such as travel, leisure, aerospace, and general retailers. Others industries such the life insurance and non-life insurance have also issued profit warnings based on a rise in claims on insurance policies. In the coming months data will be coming out in the trade credit insurance sector, showing just how big an impact the Covid-19 lockdown is having on some of all companies as trade credit insurance premiums continue to rise and credit defaults events escalate.
Which sectors entered the crisis with the least amount of cash on their balance sheet?
Unfortunately, the vast majority of companies are confronted with declining demand for their products and services. Some of the hardest hit sectors are currently the travel and leisure, public transportation, commercial real estate, industrial engineering, automobiles, spare parts, and electrical equipment manufacturers. Some of these companies started the year with weak cash balances, which means they are at significant risk of creating credit defaults and performance risks with supply chains over the coming months.
How can we help?
It is essential for business leaders and operational managers to perform a full end-to-end analysis of performance risks and deteriorating credit quality within their supply chains in order to proactively build resilience within their business.
We are building customised analytical tools to give our clients the ability to see beyond static spreadsheets by giving them the ability to drill-down into the detail they need to make evidence based decisions in risk management and cash-flow generation, quickly.
We are bridging the gap between what Chief Financial Officers, Treasury Managers, and Credit
Risk Managers need to manage costs, maintain cash-flows, and manage credit risks. We're also bringing Chief Operating Officers, Chief Procurement Officers and Supply Chain Managers into the picture to help management teams optimise the allocation of resources to keep their customers satisfied.
If you would like to find out more, or would like a demonstration of some of the advanced analytical tools that we build, please get in touch with our Technical Director, Brian Greig.
+44 (0) 203 920 9378