Players in the consumer goods space opted to trade more cash for credit in the first three months of 2019 in a bid to enjoy better customer patronage and bolster their shrinking revenue base.
In the first quarter of 2019, efficiency of consumer gods firms in generating cash from sales dipped, according to data compiled from company financials, as the manufacturers settled for ‘half a loaf’ in getting their products off the shelves into households.
Analysis of the operating cash of ten (10) players including Cadbury, Nestle, Vitafoam, Nascon, Dangote Sugar, Dangote Flour and Champion Brewery among others, revealed that cash flow to revenue turned negative to -37.54 percent in the first quarter of 2019 compared with 21.40 percent a year before, signalling worsened cash efficiency.
According to Yinka Ademuwagun, research analyst at Lagos-based United Capital Plc, consumer goods firms are embarking on aggressive credit strategy to retain their customers and boost top-line growth knowing fully well that customers’ wallets are stifled.
“Consumer goods are facing a hard time. Any firm that can’t sell cheap or on credit in this current weak consumer wallet will suffer. That is why most of them are extending credit.”
Of the ten players covered in the analysis, only Nigerian Breweries recorded better cash margin of 8 percent in the review quarter as cash flows from operating activities of the beer maker outpaced top-line growth.
The operating cash margin measures how firms are able to generate cash from every naira sales they make. It is obtained by dividing a company’s revenue or sales over a period by how much operating cash the said firm was able to make in the same period.
A higher figure shows that a company was able to convert a higher proportion of its sales to cash and a lower figure communicates the reverse.
The ten firms covered, collectively generated N40.2 billion cash from operating activities in first quarter of last year, but the figure worsened to N4.6 billion cash only, in the review quarter of current year.
However, since cash is king, the trade-off of cash for credit in bolstering sales, might affect the ability to meet obligations likes paying up credits and salaries unless ‘ the companies are able to negotiate longer payable days with their suppliers and creditors than it takes to get their debtors to pay,’ Ademuwagun said.
Firms do not always receive value in exchange for their products at the point of sales to other participants’ down the distribution chain (wholesalers, retailers, and even consumers), in the same way they do not always make cash purchase from their suppliers.
‘If receivables grew and payables dropped, then it’s a problem as firms would be paying their suppliers before even receiving money from sales’ he furthered added although he explained the current credit sales strategy to be sustainable.
Israel Odubola & Segun Adams