Coronavirus and Cash Flow
Since the onset of the Coronavirus and the UK lockdown, one topic that has frequented the business pages is cash flow. This blog aims to give some contextual examples as to how some industries have been affected and ends with a research task that can be used to support online learning.
With all but essential retailers closed, the majority of firms have seen the taps turn off overnight and revenue from cash sales plummet, putting extreme demands on cash reserves and creating liquidity pressures. Those that are reliant on cash sales and those who have money tied up in inventory and receivables no doubt felt the pinch quickly. Firms with an online presence will have clearly benefitted but the sudden increase in demand that some have seen, has resulted in websites only offering sales for limited hours in a day or even implementing queuing systems, to manage demand due to a lack of capacity. This in itself still creates a cash flow issue. We have also seen firms cancel dividend payments to shareholders in order to preserve working capital.This article goes into further detail regarding the insurer Aviva cancelling its 2019 dividend payment.
The impact on high street names
High street retailers were already struggling prior to the crisis. A report by the British Retail Consortium suggested that 2019 was the worse year for retailers in 25 years. Therefore in a sector that was already struggling, the crisis couldn't have come at a worse time.According to an article in The Times on the 10th April, Callum Jones wrote that the projected cash flow of 34 leading retailers was set to fall into negative territory. Some of these retailers include high street names such as: JD Sport, Dixons Carphone and Pets at Home. This was based on modelling from a consultancy firm that forecasted a 70% fall in sales. Post-crisis, what will the high street look like? For those that survive, how will their operations be affected by the lack of cash?
Planes and Automobiles
Airports and airlines have also been some of the hardest hit. As countries closed their borders, fleets of planes were grounded and along with that, revenue streams. In an article in the Economist, it was put forward that three quarters of airlines couldn’t cover costs beyond three months. Some of the biggest airlines have managed to secure credit lines from banks to support their working capital and strengthen their liquidity positions. This still begs the question, what will the competitive landscape look like in 6 months time? Will we see state aid as in the case of the USA. To read more about how the airline industry has been affected click the following links to articles in The Economist and The Guardian.
The unprecedented fiscal interventions by the government aims to prevent industrial scarring and the furloughing of workers via the job retention scheme. This will no doubt prove to be extremely beneficial but some firms will still suffer. Car manufacturers face significant fixed costs which must still be paid regardless of production. One UK firm which has been reportedly ‘scrambling’ to save cash is Jaguar Land Rover. A report in the April 5th edition of the Sunday Times stated that the shutdown of UK operations was estimated to cost £1bn a month. JLR is known for its R&D and has expanded its operations in the UK to support electric car development; fitting with changing market conditions and external pressures.
The new Jaguar XJ is the company’s latest addition to its electric vehicle (EV) portfolio and it is touted as the rival to the Tesla Model S.
When Jaguar’s production facilities reopen, management are faced with two choices:
1) Do they continue development of the car, ready for a launch in 2021?
2) Prioritise production of the 'cash cows' in their product portfolio; Range Rovers and Land Rover Defenders?
Use the internet to conduct some research. Consider the merits and drawbacks of each option and justify which you think JLR should choose.