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Turning the Corner

Reading the economic runes is never easy, particularly when it comes to the economically vital small- and medium-sized company sector, but ABN AMRO Commercial Finance’s 'Cashflow Barometer' suggests that SMEs have turned an important corner on the road back to solid growth

Over the past few months the business page headlines have been dominated by market volatility, the crisis in the Eurozone and UK growth statistics showing growth of just 0.2% in the second quarter. The relentless flow of market data and macro statistics doesn’t necessarily give a complete picture of the state of the UK economy, particularly regarding small- and medium-sized companies. So it’s heartening to see that our latest Cashflow Barometer reveals that SMEs appear to be doing rather better than expected in what remains a very difficult commercial environment.

Indeed, the statistics covering the period from year end 2009 to the second quarter of 2011, suggest that SME have seen their turnover rise by 16.2% compared with a 10.5% decline across 2007 and 2009. In other words, turnover has returned to
pre-recession levels. The growth in revenues isn’t stellar but it is significant. At a time when companies of all sizes are battling against some very real economic headwinds, it does seem that SMEs as a group have turned the corner from contraction to growth.

The good news extends beyond the headline figures on turnover. In contrast to the 2007/2009 period (when there was a fall of 9%), the numbers of invoice issued rose 16% in the following year and a half, while number of customers owing money to businesses also increased to pre-downturn levels. Combined, these figures suggest that businesses have been increasing the numbers of customers on their books. There was also good news for the return of healthy working capital, with average debtor days falling between year-end 2009 and Q2 of this year – an encouraging trend.

Click here to see our Cashflow Barometer.

Sector Success

Our figures contain some welcome news for policymakers. One of the key objectives of Government policy has been the much-talked-about rebalancing of the economy, with a resurgence of manufacturing seen as particularly important.

Statistics on this front have been mixed. At the beginning of 2011, the Chartered Institute of Purchasing and Supply (CIPIS) published January data showing manufacturing output growing at the fastest rate since 1992. In contrast, Government data for June 2011 indicated that manufacturing growth had dropped 0.4%. In volatile times, manufacturing output data will rise and fall but our own figures point to steady improvement over time. Over the year and half from the end of 2009 to
Q2 2011, turnover in manufacturing and engineering are up 32% and 19.1% respectively in the SME sector.

There was also positive news on exports, albeit latterly. 2010 was undoubtedly a disappointing year with overseas sales down by a worrying 33%. However, in 2011 the fortunes of exporters did a fulsome U-turn with revenues from overseas sales rising 46% in the first half of the year. Essentially this means that turnover from exports is just two percentage points shy of its 2008 peak.

Times have difficult and many businesses have had to make difficult decisions regarding cut-backs as they struggle to maintain efficiency. The public sector cuts have yet to fully kick in, of course, but overall private sector companies have done their best to hang on to their staff and, by extension, the skills they will need to take full advantage of the recovery.

Our data suggests that businesses are retaining staff and they are hiring again, albeit cautiously by hiring temporary staff. Turnover from the recruitment sector rose 27.9% between year-end 2009 and Q2 2011 and this is particularly encouraging as performance in this sector is often a barometer for the wider economy.

Preparing for the future 

No one would claim that SMEs are set fair for an easy time over the next few years, but what our cashflow information does illustrate is that Britain’s small- and
medium-sized companies aren’t simply bumping along the bottom. Overall there has been a recovery in this segment of the marketplace and while there will doubtless be setbacks in the months ahead, we can reasonably expect that the long-term trend will be towards further expansion and higher turnover.

So the question that many businesses are asking themselves now, is how to fund that expansion.

This is an issue that our clients have been addressing. Over the past year or so, we have observed a shift in thinking among our new and existing clients. Put simply, increasing numbers of our customers have moved from the survival mode of 2008 and 2009 and are now planning for the future.

Refinancing is a case in point. In the trough of the downturn, refinancing was often a matter of necessity in the face of adverse market conditions. Today it is a different story. An increasing number of businesses are seeking to refinance either in response to perceived opportunities in the market or because their medium-term projections and planning indicate that new funding will be required.

On the opportunity side of the equation there is clearly a lot to play for. Clearly, rising demand will, in itself, create opportunities to raise revenues but with many businesses seriously weakened by the downturn, stronger rivals are well placed to increase market share at the expense of competitors – always assuming, of course, that the finance is in place to fund their trading. Certainly we are seeing an increasing number of companies coming to us proactively rather than reactively for “progressive refinancing” packages that will provide them with the headroom they need to grow, either organically or by acquisition.

It’s not simply a question of the working capital required to buy stock and pay bills while waiting for customers to make good on invoices. Forward-looking companies are also keeping a weather eye on trends in the national and global economies as they project their future finance requirements. For instance, smart companies are taking into account the rising costs stemming from higher commodity and raw materials prices.

The role of ABL

At ABN AMRO Commercial Finance, our belief is that ABL will play an increasingly important role in funding the growth that our Cashflow Barometer has detected.

It’s partly a matter of pragmatism. Business owners know they’re going to need adequate finance if they are to maximise the market opportunities ahead and while the traditional banking sector does look set to meet its targets under the Project Merlin agreement with the Government, the fact is that many companies continue to struggle to secure funding. Consequently, many businesses are exploring invoice finance and the wider range of ABL solutions for the first time.

Beyond this pragmatic reaction to market conditions, what we’re also seeing is a growing awareness of the positive benefits of ABL. The route into ABL tends to begin with receivables finance in the shape of factoring and invoice discounting. Here the key benefit for fast-growing companies is the dynamic match between the performance of the business and the level of funding available at any given time. The same is true of inventory finance – often used as a complementary solution to smooth over the peaks and troughs experienced by cyclical businesses.

However, once businesses look beyond receivables and inventory funding to the wider range of asset-backed solutions – including loans backed by plant and machinery, and property – they often find that ABL is more than a source of working capital. It can also provide the headroom for a broad range of expansion strategies from investment in capacity to acquisitions.

Our own experience of the market indicates that by leveraging funding against assets, businesses can obtain as much as 50% more than would be available via more traditional products. For SMEs, the sums achievable – anything from £0.5m to £5m can make a real difference to their ability to trade successfully.

If the trends highlighted in our latest Cashflow Barometer continue, Britain’s SMEs will need access to finance if they are to avoid the working capital pitfalls that inevitably open up when business begins to pick up. ABL can provide the required funding but equally importantly, it offers security. ABL providers – ABN AMRO Commercial Finance included – stayed open for business during the financial crisis. Today they stand equally ready, willing and able to support the recovery.

Case Study – Harman Technology

A refinancing package comprised of receivables and inventory finance is enabling imaging specialist Harman Technology to diversify and step up overseas sales.
The 132-year-old company is best known as a supplier of photographic products and is currently the world’s largest supplier of black and white film. Marketing its products under three brands – Harman, Ilford and Kentmere, the business is an export success story, earning about 85% of its revenues from overseas sales.

The company isn’t, however, resting on its laurels. Having developed a technology to harness the anti-microbial properties present in silver, Harman has ambitious plans to diversify into markets such as medical diagnostics, plasters and sportswear – areas where its expertise can be commercially applied. “While our core business centres around photographic products, our expertise has developed over the last century into a robust proposition for other markets where silver has commercial applications,” explains chairman Howard Hopwood.

Harman chose an asset-based-lending solution to fund its plans to diversify and increase overseas sales, securing a £4.95m facility from ABN AMRO Commercial Finance. “We wanted a specialist in ABL and chose them because they took the time to understand our business and created a solution which allows us to leverage against our assets, enabling us to invest in our existing offer as well as expand into this exciting new product stream,” adds Hopwood.