Insider Business: working capital management

Was UK plc prepared for this crisis and will negotiating payment terms

Martin Williams, MD Graydon

British business is facing a triple whammy if you like: very little credit
from banks; very little credit insurance cover in the general market; and a
slowing down of payments from overstretched companies who are buying from them.

Apart from that, coming into the recession, I don’t believe that British
business in general was well placed to face up to the circumstances. We have
done an analysis recently which showed that something like 60% of incorporated
companies had high risk, or above normal risks, attached to their businesses
coming into the recession. All too often we saw negative working capital, and
high borrowing characteristics as part of the British profile. So they weren’t
well placed coming into this credit squeeze.

There is no harm at all negotiating extended payment terms with your
suppliers or creditors, that is something that all businesses should do to
improve the cash position. But on the other side of the coin, they have to
improve their cash collection techniques and in the short term they can do an
awful lot.

It is unfortunate that we are facing a credit crunch, or a credit squeeze,
and something like 90% of British businesses don’t employ credit management
specialists. That’s not because they’ve refused to take them on or they don’t
understand the importance of cash flow or credit management. It is, basically,
because most of the businesses in Britain are too small to take on a specialist
and many companies don’t have financial managers let alone credit managers or
senior management specialists. That is a problem, because when you really need
that skill set it doesn’t exist for a lot of small businesses.

What’s the first task when tackling working capital?

Mark Palios, Turnaround specialist and former partner at Pricewaterho
useCoo pers

As confidence has failed, all around stakeholder management is key and
clearly within that the banks are the starting place for many people.

The banks have problems themselves, as we all know. One is that they have
limited resources in terms of cash, but they also have limited resources in
terms of people. If you are going to get a shout, and to get their attention,
you are going to have to make sure that you do a few things.

In managing that relationship, I think the first thing is to go and change
your covenants because covenants are the trip wires that gets the banks into
negotiation with you. Almost every single business that I’ve looked at in the
last six months has had covenants set at a time during a covenant light era with
high leverage, which means that the sensitivity in those covenants was about 15%

If your business had a downturn of about 15% then it might start to trigger
the covenants, which is when the banks would come to speak to you about your
financing. What certain industries are seeing is that anything from 30% to 40%
and 50% downturns.

If you are in that situation what you have to do is get in there early and
have a plan – and this is where working capital comes in.

What are the working capital priorities?

David Santaro, executive partner, IBM Global Business

A KPMG report found 84% of surveyed CFO’s felt the ability to forecast cash
and manage working capital was a top priority, yet only 14% had the ability to
gain visibility into working capital management, etc. They don’t have the
insight, the data, and the facts around levers that really drive and improve
working capital performance.

The priority is around organic cash flow release, or organic cash flow
generation – without the ability to gain insight into what drives organic cash

If I look at my receivables management processes for instance, my payables
management processes and how I deal with my suppliers, even in terms of
inventory, my inventory carrying costs, and how cash and working capital can be
released from those processes – CFO’s are flying blind and it is something that
has to be addressed.

We looked at 130 organisations either UK based or with major UK operations.
Across 14 industry groups without exception, every industry group has seen an
increase in DSO (days sales outstanding) over the last 18 months. It’s
indicative of the fact that they didn’t have their houses in order around credit
management, around collections, around their billing processes and cash
conversion processes etc. Just getting back to basics around receivables
management is key.

Chaired by Gavin Hinks

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