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http://www.moneyweek.com/file/51434/more-b...ut-of-cash.html

More bad news: British businesses are running out of cash

31.07.2008

by David Stevenson

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Why the recession could be worse than anyone expects

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Money makes the world go round. Or to be more precise, it oils the wheels. The prices we pay for everything, from property to petrol, all boil down to how much cash there is knocking around the system.

We all know that when money begins to run low, we start to get worried. And this applies to more than just your household finances.

A slightly obscure set of numbers released by the Bank of England every month – the money supply figures – show a very alarming trend developing.

It looks like British companies are running out of money, much faster than at any time since the early 1990s. As you might suspect, that's very bad news for Britain…

British company balance sheets are starting to leak cash

British companies are running out of money. And the lesson we've learnt from the last two decades is that when this happens, our economy is just about to fall off a cliff.

Last week, I mentioned how one of the key measures of the money supply in the UK, 'adjusted M4', which covers the amount of cash businesses hold, had shrunk by 3.5% over the three months to May.

Well, a couple of days ago, the latest Bank of England numbers were published. And the speed of decline is quickening. Another 0.7% fall last month has deepened the plunge since February to almost 4.5%, and increased the year-on-year drop to 1.7%.

In other words, these firms' balance sheets are now starting to leak cash – the amount of money they have "at their fingertips" as Paul Dale of Capital Economics puts it, is now falling, not rising.

You might assume that this is because companies, like consumers, are finding it harder to borrow money. But although lending is certainly slowing, the main problem in fact seems to be that companies simply don't have the cash coming in the door.

Take a look at the chart below, courtesy of Capital Economics and Thompson Datastream. It breaks down the M4 figure into "lending" and "holdings". They're fairly self-explanatory, once you know that 'Non-Financial Companies' is Bank of England jargon for firms that either make things or provide services that aren't in the financial sector.

08-07-31-mm1.gif

As you can see, businesses are still borrowing at an annualized rate of more than 13% - it's the cash they have in the bank, basically, that's falling.

The real reason why businesses are running out of money

So what's going on? This may be down to some technical change, due to the turmoil in the credit markets. But the real answer could well be much more scary.

If businesses don't have as much money in the bank, what does that suggest? Maybe some credit lines are being extended, i.e. customers are paying their bills more slowly. For example last week, Boots told its suppliers that it wouldn't be settling accounts for 75 days, up from 30 days previously. Even though that one has since been overturned, "big companies appear to be aware that small businesses are afraid of taking them on over payment terms and are abusing their power as a result", said John Wright, national chairman of the Federation of Small Businesses.

.........

Why the recession could be worse than anyone expects

The bottom line is likely to be devastating. Many more profits falls are in the pipeline. Companies' capital spending will be the first thing to be chopped. That'll be bad enough. But the really big issue will be that lots more businesses will go bust, and many more jobs will vanish. Anyone who tells you that the British economy and companies are going to 'muddle through' is in complete denial. They're not.

As you can see, UK GDP growth has been pretty stable over the last 15 years, as Gordon Brown never ceases to remind us. But whenever those 'M4' money holdings have slowed up, the economy has suffered. And the really bad news is that we've never seen anything like the recent slump in all the time the Bank of England has kept records. If the relationship between M4 money holdings and GDP growth holds, then it looks like we could be heading for as much as a 2% year-on-year slide in annual GDP growth. Very nasty!

This is the cheeriest piece of news I've read all day...... :o

Will there be anything left of our fundamentally strong economy at the end of this?

We have a consumer based economy people stop spending and our companies can't work out why??? I say get the housing market moving what on earth is Brown playing at :ph34r:

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http://www.moneyweek.com/file/51434/more-b...ut-of-cash.html

This is the cheeriest piece of news I've read all day...... :o

Will there be anything left of our fundamentally strong economy at the end of this?

We have a consumer based economy people stop spending and our companies can't work out why??? I say get the housing market moving what on earth is Brown playing at :ph34r:

I must say that our customers are taking even longer to pay than normal, sign of the times and probaly worse to come, it would be the odd few taking 60days+ now there are lots trying to do it and those in the 60days have become 90-120!!

I tell you what though, late with your HM Customs Payments and you soon learn who to pay quickly!!

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I must say that our customers are taking even longer to pay than normal, sign of the times and probaly worse to come, it would be the odd few taking 60days+ now there are lots trying to do it and those in the 60days have become 90-120!!

I tell you what though, late with your HM Customs Payments and you soon learn who to pay quickly!!

I haven`t got any customers, so I`m not waiting for them to pay me.

I`m not earning any money, so I won`t have to pay the Inland Revenue anything.

I believe this is called a win-win situation. :lol:

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I really started to get a sense of how bad this recession could be yesterday. The company we've just started using as a supplier for cds, S Golds, who are an old and well established family firm, been in the trade since the fifties, have gone into administration. When we were discussing it yesterday afternoon, turns out that the company that are supplying our new carpets have also just gone bust, another well established firm.

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Deflation it is then.

VMR.

I must admit, I do feel a little deflated.

Mind you, I was suffering after that curry I had last night, better out than in !

:ph34r:

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I must say that our customers are taking even longer to pay than normal, sign of the times and probaly worse to come, it would be the odd few taking 60days+ now there are lots trying to do it and those in the 60days have become 90-120!!

I tell you what though, late with your HM Customs Payments and you soon learn who to pay quickly!!

I agree, we're noticing the same. The payments have gradually increased from on average about 60days to 80days. Sales are slowly falling as well, so putting people on stop is counter productive, unless they really take the mickey. I guess it's survival of the fittest now.

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I really started to get a sense of how bad this recession could be yesterday. The company we've just started using as a supplier for cds, S Golds, who are an old and well established family firm, been in the trade since the fifties, have gone into administration. When we were discussing it yesterday afternoon, turns out that the company that are supplying our new carpets have also just gone bust, another well established firm.

Christmas 1992 was when me and my brother got our first computer. 4 months later, the firm it was bought from went bust. We later got a printer for it, and the company that sold us that went bust not long after. Then the shop we bought games from went bust. Next, the shop that once repaired it went bust. Add in a mail order games supplier that went bust, too (the only time we lost money). By 1994, the computer manufacturer had gone bust as well.

If anyone owns a computer shop, beware me walking through the door! :lol:

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Christmas 1992 was when me and my brother got our first computer. 4 months later, the firm it was bought from went bust. We later got a printer for it, and the company that sold us that went bust not long after. Then the shop we bought games from went bust. Next, the shop that once repaired it went bust. Add in a mail order games supplier that went bust, too (the only time we lost money). By 1994, the computer manufacturer had gone bust as well.

If anyone owns a computer shop, beware me walking through the door! :lol:

Over the past 20 odd years, computer retailers have virtually destroyed each other. I think that PC and PC component retailing must be one of the most competitive businesses to be in. Not only is it a nightmare, due to continuously falling prices and rapid changes in technology, but margins are wafer thin. I tried it on a very small scale, but gave up after a while. It seems that the only way to survive is to pile `em VERY high, and sell `em VERY cheap. I used to buy Micromart on a regular basis, I bet most of the advertisers that I remember from a few years back are no longer in existence. Companies like ebuyer.com seem to have "cracked it", but I wonder how close to the edge they are living ?

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Why the recession could be worse than anyone expects

I don't remember being asked, were you?

The great assumption, none of us saw the bleedin' obvious coming <_<

Will the deflationists be dumping their gold hedges now? :rolleyes:

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Good point Laura, I did warn quite a few friends and family members, but I was never asked.

Anyway, we musn`t talk ourselves into recession, must we ? I promise not to mention that there has be a huge decline in my workload, and I did accidentally notice that Nationwide have reported another drop in house prices. Despite all of this, I owe it the the country to go out and spend all my savings, too keep the economy going. Not that I really need to, as there is no recession, apparently.

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everybody is running out of money ,

an old work place is laying off staff as their clients are not paying up,

this place is looking vulnerable too.

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http://www.moneyweek.com/file/51434/more-b...ut-of-cash.html

This is the cheeriest piece of news I've read all day...... :o

Will there be anything left of our fundamentally strong economy at the end of this?

We have a consumer based economy people stop spending and our companies can't work out why??? I say get the housing market moving what on earth is Brown playing at :ph34r:

Very scary indeed. If Boots are delaying payment, it is either because they want to earn the interest, or they themselves are short of cash. Does a credit crisis cause a gradual reduction of money, meaning everyone gets a little short of readies, delay paying, reduce circulation, further reduce cash, get shorter in cash... oh dear, I guess it does.

This could be very bad indeed. I guess that FTSE 100 companies get hit last in this type of scenario because they are able to borrow and often have good credit ratings. So the FTSE could be a really lagging indicator in this coming crisis, and it is already down by almost 20%..

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Very scary indeed. If Boots are delaying payment, it is either because they want to earn the interest, or they themselves are short of cash. Does a credit crisis cause a gradual reduction of money, meaning everyone gets a little short of readies, delay paying, reduce circulation, further reduce cash, get shorter in cash... oh dear, I guess it does.

This could be very bad indeed. I guess that FTSE 100 companies get hit last in this type of scenario because they are able to borrow and often have good credit ratings. So the FTSE could be a really lagging indicator in this coming crisis, and it is already down by almost 20%..

So your feeling positive today about the economic situation.....

Perhaps everyone is following the banks and hoarding cash?

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Very scary indeed. If Boots are delaying payment, it is either because they want to earn the interest, or they themselves are short of cash. Does a credit crisis cause a gradual reduction of money, meaning everyone gets a little short of readies, delay paying, reduce circulation, further reduce cash, get shorter in cash... oh dear, I guess it does.

This could be very bad indeed. I guess that FTSE 100 companies get hit last in this type of scenario because they are able to borrow and often have good credit ratings. So the FTSE could be a really lagging indicator in this coming crisis, and it is already down by almost 20%..

Possibly. The alternative is that they decided that paying bills wasn't core business and outsourced it to a supplier who doesn't bother with paperwork. Its a risky approach for a major company to let themselves get a bad financial name. Stock have fallen sharply on far less.

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  • 395 Brexit, House prices and Summer 2020

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