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Advancing the credit profession

Is Cash Always King? – guest blog by Jo Kettner, CEO of Company Watch



27 June 2019

For many credit professionals the phrase ‘cash is king’ has become rather hackneyed and over-used.

Clearly cash is vital to enable the continuity of the company and to meet its immediate obligations. Cash can arise from trading operations or from debt, shareholder or asset disposals. Cash also provides the business with a physical cushion, to cover those times when forecasted revenue is lower or costs are higher than predicted or when the external environment is in a downward trend or recession.

Without a strong cash flow businesses are not able to continue supplying goods to customers or to pay their suppliers.

However focusing on just cash misses the broader assessment of the financial health of a company. Rather than just focusing on cash flow and the cash balance, it is essential to assess both the Profit and Loss statement and all aspects of the balance sheet.

Using all of the statements in the Accounts of a company gives a far clearer picture of the financial health (and its relative strength), and allows credit professionals to identify areas of risk and mitigate exposure.

In the annual accounts, the cash flow statement looks strictly at the cash generated and cash expended over the period, whereas the Profit & Loss statement reflects the income the company is legally entitled to as well as its committed expenditure, irrespective of cash movements. This gives a better view of the company’s ability to generate profits irrespective of whether actual cash has been received during the year.

When looking at the Cash balance in the balance sheet, this has to be viewed in light of the company’s level of liabilities – both short and medium term.

When assessing a company, it is also essential to look at the wider Group Structure or Parent Company to identify the overall health of the group as well as any contingent liabilities the company may have. Likewise, viewing the number and status of any County Court Judgments and the company’s payment history give an indication of the health of the company.

So while cash should be a key measure within the credit process, it should not be viewed in isolation. For a really robust credit approach, there are a number of metrics which should be used to create an effective credit risk process.

Some examples of companies that had positive cash flows and balances are:

Interserve Plc: Interserve, the major outsourcing firm, was generating high levels of sales of £2.9bn. In addition, they had a cash balance of around £200m plus they had a net increase in cash flow during the period of £47.5m. Yet, following these results, they went into administration in April 2019. What was also disclosed in the accounts was trading losses plus in the balance sheet, they had Current liabilities of £775m and long-term liabilities were £805m. In this case, Cash in isolation clearly did not highlight the vulnerability of Interserve.

Carillion – one of the largest UK failures in the past decade had a cash balance (net of short term debt) of £353m. Again, the company failed because of its losses and huge liabilities – current liabilities of £2264m and long-term liabilities of £1800m

House of Fraser – the department store retailer which failed in Sept 2018 – had a cash balance of £72.9m in its latest financials prior to failure.  At the same time, Current liabilities were £370m and long-term liabilities were £465m.

Looking at a different kind of example, we have Countryside Properties Plc – the major UK housebuilder, which generated sales of over £1bn in Sep 2018. Cash balance was virtually zero, operating cash flow was a negative outflow of £13m & net cash outflow during the year was negative £47m. However, the company remains exceptionally strong as their liabilities are well covered by their assets.



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