Players in the consumer goods space generated less cash from sales in mid-year 2019 amid a challenging operating environment and in a bid to shore up their revenue base.
Analysis of the operating cash of ten players including Nestle, Cadbury and Nigerian Breweries revealed that cash flows to revenue slumped to 6.4 percent in first half of 2019 compared with 17.3 percent a year before.
Firms’ worsened cash efficiency was on the back of weaker cash receipts from operation which dipped some 19 percent to N92.4 billion from N114.8 billion last year.
Revenue of 10 consumer goods firms with H1 results grew 1.99 percent in the period.
Operating cash margin is cash generated from operating activities as a percentage of sales revenue in a certain period. A higher figure means that a company was able to convert a higher proportion of its sales to cash and a lower figure implies the converse.
Without positive cash flow, a firm may to embark on borrowing, raise additional equity or may have to quit operations as it does not have cash to buy supplies, pay salaries, bills etc.
However, having negative operating cash flow margin for a time is not always a bad thing. If a firm is building additional plant for example, this could pay off in the end if the plant generates more cash.
The trend among the 10 firms shows that amid a slowly recovering economy which has constrained industry growth, manufacturers have settled for ‘half-loaves’ in getting their products off the shelves to households.
“This reflects the fact that consumer goods firms are not efficient in the way they get revenue,” said Yinka Ademuwagun, analyst at Lagos-based United Capitals.
“The companies spend a lot on advertising, marketing, distribution and logistics,” which burns cash.
The analyst however explained that whilst the nature of their business required spending on the aforementioned, poor state of Nigerian roads, among other reasons, increased their cost.
Performance was mixed across sub-sectors. While beer makers saw their cash margin improve, sugar producers and flour millers recorded weaker margin with food product manufacturers lagging peers.
Producers of beers generated cash worth N740 for every thousand naira earned in revenue, 64 percent more than N451 cash realized last year.
Combined cash generated by Nigerian Breweries, International Breweries and Champion Breweries nearly tripled to N61.6 billion in the review period, from N24.6 billion last year, while sales revenue grew some 6.3 percent to N242.3 billion. The stellar performance was buoyed by betterment in Int’l Breweries’ margin that jerked up to 50 percent from 14 percent last year.
In the food and beverage space, players including Nestle, Cadbury, Nascon and Unilever saw margin tanked to 10.83 percent in the first six months from 32.56 percent posted last year, as cash realized from operations plunged 65 percent to N21.4 percent.
A close look at the numbers showed that Unilever’s poor number dragged peers, but notwithstanding individual performance was weaker in the review period.
For sugar producers, cash margin slumped slightly to 21.15 percent half-year 2019, spurred by decline in cash (-14.3%) than revenue (-4.5%).
Consumer goods firms, for reasons including the short life-cycle of their products, do not always receive cash in exchange of their products to other participants in the distribution chain as they also enjoy credit from suppliers.
However balancing credit sales and purchases is vital in reducing the risk of the business becoming cash-strapped.
Israel Odubola & Segun Adams
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