Less cash to pay dividend
An interesting study conducted by the Georgia Tech Financial Analysis Lab suggests that we still haven’t seen the worst of the crisis.
They have examined the relative level of free cash flow in different non-financial industries.
The latest numbers in the study showed that the current level of free cash flow is still relative high, however, the figures only goes up until September 2008, so we haven’t yet seen the full effect of the credit crisis, which would actually be very interesting.
Free cash flow is what companies generate and have left to pay, for example, dividends or acquisitions.
We have already seen many companies cut dividend and stop share buyback programs. It must be because they have already seen the level of free cash flow shrink. I am sure we will see more of this in the coming months and even years.
The low levels of free cash flow will limit the companies possibilities especially now in a market where credit has never been tighter.
Cash flow is the blood of the company and when there is less of it around it limits the companies’ opportunities to move and improve their situation. So what can a company do?
Many companies can still improve the management of their working capital and free up cash stored in inefficient working capital management.
And this is not rocket science, but often just simple measures such as better liquidity forecasting or centralised payment factories.
I still meet companies that haven’t centralised their cash and payment despite the clear advantages such as reduced working capital requirement and cost savings.
This may not help solving the world’s economic crisis, but could still help some companies survive the economic downturn in better shape and maybe even help them take advantage of the crisis.
