FOR BUSINESSES weathering a difficult economy, hoarding cash has been the order of the day. Research by Capita Asset Services found that FTSE 100-listed UK firms increased their cash holdings by 34 per cent in the five years since 2008.
But as the economic pendulum swings, investors are grumbling. Apple, which according to Moody’s holds 10 per cent of all US corporate cash (if you discount financial firms), has revived the interest of activist Carl Icahn. He wants it to spend $150bn buying back stock. Icahn, however, isn’t the only one wondering what companies will do with their reserves.
The question extends to small and medium-sized enterprises (SMEs), the subject of research released by Deloitte today. In the most optimistic results since the advisory firm started surveying entrepreneurs in 2008, 82 per cent expect their business to grow by at least 10 per cent in the next year. And after years of saving and waiting for recovery, 56 per cent now say they will use cash to finance growth. Animal spirits seem to be returning to the sector: while 32 per cent were actively stockpiling cash in 2012, just 15 per cent are doing so now.
THE LIVING DEAD
Not immediately investing profits, of course, isn’t always a bad thing. As Keith Willey of London Business School noted in Deloitte’s 2012 research, “careful management of a cash buffer is only prudent”. Firms ultimately fail through lack of cash, not lack of profit.
And saving doesn’t imply lack of expansion. Organic growth – through what Mark Doleman, head of entrepreneurial business at Deloitte calls a “bunker mentality of cost reduction, margin enhancement, stockpiling cash” – can be sensible.
But now the pendulum has swung, this leaves many facing a quandry. If entrepreneurs have spent five years stuck in a steady-as-she-goes mindset, how can you upscale rapidly? As Willey notes, “the entrepreneurial scene is haunted by what venture capitalists call the living dead – the companies that survive bad times but fail to grow in the good.”
“It’s about the business model,” Doleman says. “Most people are unclear about how they will change their model for growth.” This is partly reflected in Deloitte’s results. Nearly half of companies said that organic growth would still be their main strategy this year. But the 30 per cent or so who say they’re going to boldly create new products or services, or enter new markets, may have distinct qualities.
First, there’s the nature of the firms themselves. “Every leader has to ask whether they have an inherently scalable business,” says Willey. And if margins have been sacrificed in the lean years – possibly including staff cuts, and the offloading of then-unneccessary internal expertise – he argues that it’s important to “call the changes and make sure to get on the next wave of growth not the last one.”
Second, “people still struggle with technology,” says Doleman. “Most entrepreneurs aren’t using digital technologies at all.” Nearly 40 per cent of the sample didn’t embrace social media. Companies that will really grow over the next few years will be those that make the right investment decisions now. “If I were a SME, I wouldn’t even bother with back office finance or IT services. I’d outsource it all,” says Doleman. He also suggests investment should be focused on improving customer interaction: “successful businesses drive the highest levels of customer satisfaction.” Better analytics could be another key priority.
POSITION TO EXPORT
But Doleman says that the best way entrepreneurs can position for growth is by rethinking their markets – notably by pivoting towards export. In the results, there was “pretty much the same ratio of businesses exporting last year to this year. People are saying it takes too long, or it’s too difficult.”
Overcoming these barriers is partly about rethinking the countries you’re targeting. RBS research last month found that easy markets like Taiwan were under-represented among exporters for unclear reasons. But Doleman also says out that many companies are guilty of over-analysing the barriers. “There are low cost solutions. Find someone to partner with and test the ground.”
Tom Welsh is business features editor at City A.M. @TWWelsh