Mandy Rice Davies Moment – Of Course Debenhams Denies Cash Crunch

One of the little things that makes modern business dangerous is quite how efficient we’ve become at it. This means that it is possible to run a little closer to the wire, the edge. That is, a business can be run more efficiently. Can run on mere fumes of capital, can optimise cash flow. That’s great, it all contributes to the overall efficiency of the economy as well as the company. The downside of this is that if there’s no capital buffer, if cashflow is always being optimised, then if there’s some jolt or error then it can all come unravelled very quickly indeed.

Which is why Debenhams is denying that it has a cash crunch:

Debenhams denies cash crunch problem

Debenhams has said its cash position is “healthy” after reports some insurers have reduced cover for its suppliers.

As Mandy Rice Davies pointed out, well, they would say that, wouldn’t they? The beauty of the statement is that it could well even be true. And yet it’s still entirely possible that the company go down for lack of cashflow. For here’s the optimisation part:

Debenhams faces a cash crunch as credit insurers tighten terms for its suppliers, piling further pressure on the struggling department store chain.

One of the leading insurers, Euler Hermes, is understood to have reduced cover dramatically for suppliers to Debenhams, while rivals Atradius and Coface are said to have refused to cover new shipments in recent days.

These days you don’t just ship and hope the invoice gets paid. Well, actually, you do, if you’re on decent terms, 15 or 30 days. Suppliers to retailers very rarely are on such terms. 90 to 120 days is not unheard of. Thus people tend to buy insurance on the invoices getting paid. The retailers take full advantage of this, trying at least to turnover stock three or four times before they have to pay for the first lot. A well managed retailed might not actually have any stock at all in the strictest sense. Sure, it’s got stuff it’s agreed to pay for, but that’s not quite what I mean. Stock selling before it has to be paid for can be cashflow positive.

Excellent, but then:

Suppliers use credit insurance to protect themselves from the risk of not being paid. Euler Hermes, a leading insurer, is among those to have reduced cover.

Quite so. Which is the problem. If the credit insurance isn’t forthcoming then nor will the goods. For the suppliers know that the retailers are all running in this – potentially at least – cashflow positive manner where stock is concerned. Which is a horrible problem if more stock to sell again before it is paid for doesn’t turn up.

It’s even entirely possible that Debenham’s cash position is just fine for normal business times. But that it won’t survive the withdrawal of the insurance and thus the complete and utter change in its cash requirements. From selling stuff before paying for it to having to pay for it before selling it.

The overall idea is just great, it’s that greater efficiency for the company and the economy. But if it does start to reverse then it does so quickly and the cashflow demands cascade into a potential bankruptcy for the company. Purely because it cannot buy the things it can sell profitably, it just doesn’t have the capital nor cash to do so.