Debt financing turns wheels of business

Finance and cashflow have risen up the agenda among corporates over the past
month, as Camaxsys, Thistle Mining and finance company Merchant House all
experienced difficulties with working capital or financing arrangements

Camaxsys asked for a suspension of its AIM shares after experiencing working
capital shortfalls, and trading in Thistle Mining was halted while the company
reorganised arrangements with its creditors. Merchant House’s auditors Sawin
& Edwards also warned there was a ‘fundamental uncertainty’ over the
company’s going concern status, if it did not secure additional funding.

On the back of these announcements, FTSE100 bank Alliance & Leicester
released a report revealing that small businesses were losing £136m a year
because of expensive banking arrangements.

The report found that businesses in the southeast, London and East Anglia
were the most exposed, losing a combined £62m. Collectively, the entire
country’s small businesses could save as much as £75m on cash transactions alone
if they searched more actively for better financing deals.

‘The country’s small businesses are short-changing themselves,’ said Alex
Smith from Alliance & Leicester’s commercial arm. ‘Whilst working hard to
make money and grow their companies, they are neglecting to review how their
hard-earned cash is treated.’

A spokesman for Alliance & Leicester added there was an important role
for accountants to play when it came to advising clients on banking facilities.

‘This research suggests that small businesses need advice on their banking
financing and there is a role for accountants to do that,’ he said.

The Alliance & Leicester report focused on companies with a turnover of
£1m or less, but Sue Harding, European chief accountant at credit ratings agency
Standard & Poor’s, said banking arrangements were equally important for
larger businesses.

‘Analysts look at the working capital and financing of a company very
closely,’ Harding said. ‘It is important that companies have a good financing
structure in place.’

One company to have benefited from closely monitoring financing and working
capital position is Halfords. The auto and leisure retailer earned £2.2m in
exceptional income after replacing its borrowing facilities and hedging its new
lendings using interest rate swaps.

Despite a slowdown in trading, logistics company John Menzies said that it
was also able to sustain growth by refinancing its long-term debt and reducing
interest rate costs.


FTSE companies pick and choose application of IFRS to suit conditions in
their business.

Scottish and Southern Energy said that its adoption of IAS39
will have a ‘mildly’ net positive effect on the company’s accounts. SSE also
expanded on the effects of IAS12, revealing that it would increase the company’s
balance sheet by a little more than £300m. IAS12 haltsthe discounting of
deferred tax liabilities and forces companies to recognise estimated future tax
effects of future differences. The company also expected the value of its
defined benefit pension scheme to be reduced by £10m to £20m as a result of

Engineering specialists Weir Group’s turnover fell by more than
£100m under IFRS. Overall sales in 2004 were £739m under IFRS, down from £848m
under UK GAAP. The key change was a result of the different classification for
shares of joint ventures. Profits before tax fell by 5% and total equity
increased by 8%. Profits before tax under UK GAAP were £58.3m, against £55.4m
under IFRS for 2004.

Profit before tax will be down 3% at insurance group Kiln,
when IFRS is applied to results for the year ending December 2004. The new
standards would have seen the figures fall from £38.1m to £37m. However, IFRS
has its biggest impact on Kiln earnings per share, which would fall 8% to 12.3p.
The company said: ‘Kiln does not believe there will be any significant impact on
the fundamental economics of its business, its capital solvency or on its
ability to pay dividends.’

Support services group Enterprise would have posted a £5.9m
increase in its 2004 profits under IFRS, up to £25.3m, according to its restated
figures. The operating profit impact in 2004 of IFRS3 business combinations
equated to a £5.9m reduction in the amortisation charge, as the group chose not
to restate the standard’s effect on acquisitions made before 1 January 2004. Net
assets increased from £107m to £112.8m under IFRS. The group took advantage of
the IFRS1 exemption to elect to measure the value of intangible fixed assets at
the date of transition to IFRS, 1 January 2004, at historic cost.

Related reading