As we all know only too well many businesses are facing difficulties in the
current economic climate. A reduction in the supply of readily available funding
means that many companies of all sizes are struggling to secure finance.
Banks have become more rigorous in applying their lending criteria as they
return to risk rather than market-led pricing.
This also means that short-term borrowing is no longer available to finance
long-term strategies and commitments or in some cases, trading losses.
As cash generation supersedes both sales and profits as the key business
driver, sound financial controls are becoming increasingly important. Many
businesses are adopting a more inward looking approach.
By re-negotiating existing deals with suppliers and trying to actively manage
the working capital cycle, businesses can help themselves hold off real
financial crisis for as long as possible whilst a long term solution to their
problems is explored.
There are several ways that business can improve their cash flow:
Improved debt recovery
Despite best efforts, sometime a business will find that some customers end
up paying late. If this happens, the business should contact the customer as
soon as possible to try to resolve the issue. The business should then review
its procedures and tighten up its credit control processes to reduce the
possibility of this happening again in future.
One useful technique is to call customers shortly before the due date to
obtain confirmation that there is no query over the debt and that it will be
paid on time.
Businesses may also wish to consider taking other measures to protect
themselves against customer failure and ensuring that they do not become the
customer’s banker by default. A review of the terms of trade and in particular
retention of title clauses may also assist in future debt recovery.
Under the late payment legislation, a business may be able to charge interest
and debt recovery costs, both at its own discretion.
Look at financing
Businesses should try to renegotiate their credit limits and adjust payment
dates with main suppliers to better suit the needs of the business. Companies
should also consider alternative financing arrangements that will improve cash
flow in the short term and help provide a window to implement a profit
improvement plan. These could include factoring or invoice discounting as well
as sale and leaseback arrangements.
Other options may include supplier finance, sometimes called ‘reverse
factoring’, an option if the business is a regular supplier to a large
organisation that has an appropriate arrangement in place. Project bank accounts
(which ensure that a contractor and their supply chain receive payments promptly
through certified interim payments) and asset based lending may also help.
Grants and government funding
There are an increasing number of grants and government guaranteed financial
schemes available to help viable businesses with temporary cash flow problems.
They can assist with business development and are available from a variety of
sources including the government, European Union, regional development agencies,
Business Link, local authorities and some charitable organisations. These grants
may be linked to business activity or a specific industry sector and some grants
are linked to specific geographical areas, e.g. those in need of economic
Talk to your bank
Businesses may wish to discuss with their bank whether additional funding is
available. The medium and long-term plan should form part of any dialogue so as
not to cause undue concern, which may make matters worse. However, communication
with the bank is important as bank managers and financiers who are unaware of
problems until the last minute are unlikely to be sympathetic and will be less
able to form part of a solution.
Management may not have experienced the additional pressures of operating in
a downturn but if the business is proactive, has a robust plan to address any
problems and communicates with its bank or financier, it will usually be able to
gain their support. Other advisors such as solicitors and accountants can be
useful sounding boards and might be able to help. The earlier the business
speaks to them, the more options there are likely to be.
Bring new equity into the business
Owner-managers could support the business from their own resources; the
cheapest form of finance. Business angels might provide a source of management
expertise as well as finance. Refinancing will often buy you additional time but
will not, in isolation, ensure survival, if you fail to address underlying
problems facing the business.
Raise cash by selling under-utilised assets and then leasing them back.
However, the business must ensure it is selling the assets at market value if it
is to connected parties.
Cost cutting is often the most obvious strategy but it is not simply a
question of downsizing. Where it is appropriate, downsizing needs to be managed
properly. A knee-jerk reaction to trading difficulties can endanger the business
you are trying to save.
To summarise, the most important feature of all is facing up to the facts at
the earliest possible opportunity.
The longer the business waits to address the issues, the more difficult it
will be to resist a downturn and return to profitability. Taking action to
address areas of inefficiency or under-performance will also leave the business
in a stronger position to capitalise on any available opportunities in the
Turnaround specialists will identify and assess the problems facing a
business and drive through appropriate solutions. Our own newly launched
microsite, dedicated to helping businesses survive 2009, is just one of the ways
companies can gain useful information to help them navigate the downturn.
Are efficiency improvements possible? Can additional working capital be freed
to reduce reliance on bank financing? Is the solution simply a change of senior
management’s focus? Would a sale of non-core assets be a good idea or perhaps
the sale of an entire division? These are just some of the avenues turnaround
professionals may explore.
Mike Prangley is business restructuring Partner at
BDO Stoy Hayward
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