UK faces £570m liquidity gap

UK faces a liquidity gap of £570 million according to predictions by Allianz Trade. 

The research says that the recent banking crisis has drawn into sharp focus other weak spots within the global economy and concentrated minds of businesses leaders to protect themselves against further contagion. But with forecasts predicting that the $30trn global liquidity gap is here to stay, payment behaviours are likely to deteriorate in 2023 emphasising the credit risk in the real economy.
 
Trade credit insurer Allianz Trade’s latest Day Sales Outstanding (DSO) report assesses payment behaviours experienced by a global sample of listed companies. DSO is a measure of the average number of days taken between delivering goods or services and the receipt of payment, something that can have a significant impact on the cashflow and profitability of a business. 

DSO has contributed to an annual rise in Global Working Capital Payments (WCR), with 17% of companies worldwide being paid after 90 days. Suppliers’ role as the invisible bank is coming back in full force, increasing liquidity risks in the system and the potential for more companies experiencing cash-flow problems. 

Operational costs themselves are proving more costly too, with WCR for listed companies increasing by over 9 days to 72 days of turnover in 2022 – the largest annual increase since 2008 – following an increase of over 3 days in 2021 and Western Europe recording the highest increase.

Supply shortages have also led to firms over-ordering with over a third (34%) holding excess inventory for 90 days or more.

Maxime Lemerle, Lead Analyst for Insolvency Research at Allianz Trade UK and Ireland said “Lower growth, higher inflation, the higher cost of financing, and more non-payments have all contributed. As a result, companies are spending a lot of their financial resources simply running their business day-to-day rather than spending on investment, product development, geographical expansion, acquisitions, modernisation or debt reduction.” 

Similarly, the physical supply disruptions of 2021 have continued to affect corporate balance sheets. The shift from “just-in-time” inventory management to “just-in-case” has turned shortages into oversupply. Today, 34% of companies have inventories exceeding 90 days of turnover, with transport equipment (46%), textiles (39%), electronics (38%) and machinery equipment (36%) proving to be the most exposed.

Against a backdrop of slowing economic activity, oversupply in manufacturing sectors and tightening financial conditions, inventories are likely to decrease while payment delays should increase as in previous economic downturns. Indeed, firms with large inventories and slowing demand might be tempted to lower their standards when choosing customers in order to get rid of their oversupply, while those in sectors with less oversupply might become more selective in a more uncertain environment.

Sarah Murrow, CEO at Allianz Trade UK and Ireland, said “In this period of economic uncertainty, the need for fast payment of outstanding invoices and improved credit management practices is greater than ever to minimise credit risk. This is felt particularly keenly by small and mid-sized businesses, many of whom have limited cash reserves meaning that delays in payments can prove a major impediment to overall growth.”

“With our forecasts indicating a UK liquidity gap of £570m is here to stay, faster payment of outstanding invoices and improved credit management practices are the need of the hour to minimize credit risk. Credit managers have an increased responsibility to ensure that the necessary precautions are in place to mitigate the risk.”