Treasury Strategy & Transformation
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Responding to Economic Uncertainty

by Kevin Boyd, Group Finance Director, Oxford Instruments plc

In today’s uncertain climate, the balance has shifted more in favour of reducing working capital.

Oxford Instruments has enjoyed a reputation for product innovation for over 45 years since it was first founded, but until two years ago, there was little strategic emphasis on business growth. In late 2005, our new Chief Executive launched a growth initiative to double turnover over five years and increase our operating profit margins from 3% to 13%, which would require us to increase revenues by 15% each year. At the end of each of the first and second years of this five- year plan, we had achieved our growth objectives and increased margins to 6%. With over 90% of our products exported overseas, we have suffered from adverse foreign exchange rates. Had rates remained at their 2005/06 levels, the margin would have been 9%, the annual revenue growth rate 18%.

While we have not experienced a loss of revenue during the current period of uncertainty, we are positioning the company for potentially more difficult times ahead. Our distribution is divided roughly equally across Europe, North America and Asia. So far this financial year, we see sales holding up well, but there are differences regionally. Last year we saw no revenue growth in North America. In Europe, we saw growth of around 8% and in Asia, growth of over 20%, including over 30% in China and substantial growth in Russia, India and Japan. Overall therefore, our growth ambitions are still on target. Over a number of years, we have focused on developing both geographical and product diversification, selling in different currencies and avoiding heavy reliance on individual large customers or suppliers. We have also maintained our position in developing, supporting and distributing niche products rather than trying to compete in more commoditised sectors. We are fortunate that GBP/EUR rates have moved in our favour and have put in place FX forwards in USD, Euros and Yen which will protect our position and prevent loss of profitability through currency movements.

Focus on working capital management

Although we have not seen a negative impact so far, we cannot be complacent. We have seen a slight softening in sales in our specialist industrial analysis products in North America, although this area is still growing strongly, but we will continue to watch the signs across our business and we monitor our sales leads and revenues weekly. Working capital management has been less of a priority in recent years, but we are now focusing more actively on this area. As with many growing businesses, there will inevitably be a natural tension between sales divisions (which want to build up inventory to allow sale from stock) and finance, which would prefer to limit inventory and optimise working capital. In today’s uncertain climate, the balance has shifted more in favour of reducing working capital.