Pain will be felt across board

Jan 6 2010 by Peter McCusker, The Journal

IN 2010 some of the region’s businesses are going to experience further sales declines as economic growth and a rise in consumer spending is some way off yet.

In fact I think the knock-on effects of cuts to public sector spending will be widespread, with direct impacts on unemployment, consumer confidence and the bottom line of many businesses with public sector contracts.

During 2009 businesses have reduced their working capital requirement, sometimes proactively, but also as a result of falling sales and this has gone a long way to funding losses and the costs of restructuring.

A concern for the first half of 2010 is that the benefits of a drop in working capital are now over and some businesses will have urgent cash requirements as the recession draws to a slow close and the recovery emerges at a gradual pace.

The region’s banks will therefore be faced with an increase in requests for new money during the year.

Though there has been an increase in banking liquidity in recent months, it is still constrained compared to business as usual circumstances, not least because a number of banks have left the market, so funding may prove to be a hard won prize.

As a result, I foresee some businesses in the region becoming cash starved and unable to avoid insolvency. Indeed, as the economy stabilises, I also expect to see the pace of insolvency work increase as the lending community feels more confident in crystallising losses.

Management teams can, though, protect themselves against this by getting an honest and prudent understanding of what their cash situation will be – forewarned is indeed forearmed.

After a relatively buoyant Christmas I think rent day for retailers at the end of Q1 will trigger some retail casualties, especially as consumers will have tightened their belts in the new year as a result of some difficult to swallow post Christmas credit card bills landing on doormats.

But generally, it’s unusual that this year I cannot point to a couple of specific sectors and say that’s where I expect the pain to be felt.

Instead I predict the issues of cash shortage and public sector austerity have the potential to impact on a broad range of organisations which need to maintain focus on their financial structure and their ability to generate cash as they approach any upturn with caution.

Mark Firmin, KPMG’s Northern head of restructuring