In my previous article “Construction Post Lockdown” I brought up the topic ‘cash is king‘ in the time of Covid-19 and the fact that it will be a key criterion by the surety market in assessing the financial strength of any company looking to obtain bonds or bonding facilities. After further consideration and as we look forward to 2021 and beyond, that term is going to ring loud and true not just for bonding requirement but for the very viability of any business in any industry. Cash is the lifeblood of any enterprise.
So Why is Cash King?
Cash is the king because it cannot be changed. You cannot lie about cash. There are some numbers on the balance sheet or the business plan that can be manipulated to reflect opinions. Cash is not an opinion: the amount of cash you have is written in the summary of your bank account. Each company, especially new ventures, have to have a continuous focus on cash for two reasons. Firstly, it is a measure of true profitability and secondly, it allows and supports the continuation of the company. Ultimately it is a critical business performance metric which determines an enterprise’s long-term success. A company may have a very high turnover but without the ability to generate cash it can easily fail.
Down the Barrel of a Gun
Why am I harping on about cash? Well, as a nation we are looking down both barrels of a gun, metaphorically speaking. The first barrel is Covid-19 which over a three-month period shut down our entire economy. And in doing so, it did as much damage, if not more, than the last recession and will take some time to recover due to ongoing restrictions. The second barrel is Brexit which creates uncertainty. Uncertainty constitutes a lack of confidence for both consumers and investors. Pull the trigger on both barrels and you shoot confidence into a protracted coma.
Currently it does not feel like we are in a recession or about to enter one because we are in a bubble of government support, that support is propping up jobs, balance sheets and cash flow but this is a short-term measure that cannot last. Central Bank figures show an increase of deposits by €3 billion in April, EY chief economist Neil Gibson forecast an increase of between €8 billion and €10 billion in saving deposits by the end of 2020.
While consumers have not been able to spend money in the short-term due to lockdown there is no indication of a spending spree as restrictions are lifted. Indicators are that consumer confidence is low as we prepare for a couple of tough years with uncertainty around employment. This feeds through to all levels of businesses as consumers eat out less, go to the cinema less, and debate “will I or won’t I buy a house, upgrade my car” etc.
From a business perspective they will hold back on investment for growth and may even contract in order to survive.
While the construction industry suffered its worst quarterly decline between April and June with output slumping to 45.2 percent according to the Central Statistic Office. This is a blip due to a forced shutdown not due to a lack of demand and I’m certain that we will see a sharp increase in output as the industry plays catchup over the coming months.
However, this can be a precarious time for companies as Government stimulus plans are reduced over the next six months or so. For those that have not managed cash or built up a cash surplus, the stimulus withdrawal or any other economic surprise maybe a shock too far.
The best advice I can give at this juncture is to make sure you prioritise the importance of cash. For a business, its availability is essential to not only avoid the possibility of bankruptcy, but also to take advantage of various expansion and growth opportunities which are sure to arise.
Colm McGrath – Managing Director, Surety Bonds