One of the inevitable consequences of a long economic boom is the way a
certain sloppiness creeps into the most well-run debtor control systems. When
cheap cash is there for the taking, why bother to waste time and effort trying
to chisel days or even weeks off the debtors ledger?
Unfortunately the good times are now no more than a vanishing speck in the
rear-view mirror. We are now in the harsh, cold world of the credit crunch where
cash, once again, is king. The difference this downturn around is the deep
freeze that has settled, like a black cloud, over bank lending.
The inevitable tactical response to the flow of cash dwindling and drying up
is for companies to start ‘managing’ the way they pay their suppliers
particularly those suppliers who can’t kick back. Payment cycles start to move
out to 60 and even 90 days. This, for example, puts a tremendous squeeze on
second- and third-tier family- and owner-managed companies, which have moved
from a cash-rich to a cash-starved world in the space of six months.
Alan Flower, a director at KPMG’s corporate restructuring division, says one
of his group’s “in-demand” offerings is currently helping both plcs and
owner-managed businesses implement sound cash management techniques. “There is
no doubt that it is bad news out there right now. We’re seeing a lot of cash
flow pressure and insolvencies are going up, while others are having to sharpen
up their focus considerably on how they manage their cash,” he says.
Manage your cash
For Flower, the most likely survivors of the current environment are going to be
companies with excellent cash management cultures. “In companies that have world
class cash management, the credit control people will pick up on problems in the
client and supplier base before your sales team get to hear of them,” he says.
Acting on this and establishing a dialogue with troubled customers can save a
company significant sums.
At the same time, he says, companies have to get really slick at doing the
basics. “You have to make sure your processes are efficient all the way through,
so that you get your invoices out at the right point in time and your
documentation is 100% accurate and in place. You need to understand when clients
do their payment runs and you need to build a relationship with them and stay on
top of them,” he says.
Suppliers need to keep in mind the obvious fact that when cash gets tight, it
is the non-critical suppliers and those who are not on top of their invoicing
and shouting for their cash that end up getting put to the back of the queue.
Every company loves a silent creditor at a time like this and they show their
love by keeping their money in their pocket or parcelling it out among the
other, more vociferous creditors who are threatening to kick the door down.
Peter Flynn, commercial director at Close Invoice Financing, says there is no
doubt that some of the bigger plcs, those with big treasury functions, are now
hanging on to their cash at the expense of their creditors. “This really hits
the small- to medium-sized companies, while at the same time the cost of
borrowing for them has gone up significantly,” he says.
On the positive side, however, Flynn says Close has not yet seen a great
increase in the average debt turn on its books. He believes this is because his
credit teams have well-refined systems and know exactly how to chase debt,
proving the point that efficient debt management can significantly reduce the
impact of the credit crunch.
“We are still seeing average debt turn at around 60 to 65 days and we are
certainly not seeing any drastic slippage out to 90 days,” he says. He
emphasises how critical it is for companies to get their paperwork right. “Any
mistakes on the invoicing, any inaccuracies such as addressing it to the wrong
person or department, will be pounced on by debtors as a way of pushing payment
off to a later date,” he says.
Above all, he adds, companies of all sizes need to ensure that they keep
talking to their debtors. “Sitting and waiting for the cheque to come through
the post is disastrous. You need to ensure your team is dealing direct with the
person who writes the cheques or who puts the entry on the books,” he says.
Psychological “tricks” are vastly more effective than threatening letters.
“Where global companies go wrong in debt management and cash management is by
taking a global approach. You need to break down debt management and think in
terms of a debtor-by-debtor approach, with individual strategies for each one,”
Debt management lies somewhere between an art and a science and getting it
right in the current climate is crucial. “If you are a supplier, you need to
know where you sit in your client’s food chain. If you are one of many, your
options are limited,” Flynn says. There is no point threatening to stop their
orders if they can turn around and replace you in an instant. Under those
circumstances you would only stop the client’s order if you were convinced it
was good money after bad, he says.
The trick with this kind of situation is to decide if the contract is worth
doing even though you know you are likely to be stuck with a long lead time for
payment. If you decide it is, you can hardly complain if that’s what happens.
The only real option is to offset that kind of contract with a sufficient number
of timely payers.
Kevin Boyd, head of large corporates at Clydesdale Bank says that while his
team is seeing some stress in the wider economy, he has seen no specific
slowness to pay from larger corporates. Boyd says there are always
unsophisticated companies that look to lean on the trade, particularly in tough
times, and which will squeeze suppliers with late payments. However, that is not
a sustainable solution in the long term and the bank does not encourage it, he
“The danger of relying on late payment is that you are probably not taking a
holistic view of your working capital. You need to be considering the level of
your inventory and your overall production efficiency as well.
You need to look at the accuracy of your sales forecasting and at what you
can do to improve or consolidate sales,” he says. The point is that the more
successful companies take a highly integrated view of working capital and are
much better equipped to get through tough times.
Boyd believes Clydesdale is seeing a brisk flow of clients looking to
renegotiate their overdraft positions.
This isn’t always a sign of stress, he points out. Quite often, companies
that have been awash in cash will need to rethink their working capital
positions when cash gets tighter. Corporates are finding their own positions
coming under pressure, though, as the cost of funding goes up.
For Boyd, the real headache in the economy at the moment is not so much an
absence of liquidity and a stickiness on cash payments. It has to do with the
uncertainty in the market. “No one is sure where the economy is going or when
things are going to settle, and that makes decision-making very difficult for
banks as well as for their clients,” he says.
Colin Walls, head of sales finance for Scotland and Ireland at Barclays Bank,
also believes that the credit crunch has pushed out payment cycles. “The plcs,
as far as we can see, are looking to take extended terms from their suppliers.
This is a creep that has been going on for years and businesses down the scale
have had to be clever in finding alternative finance to make their sales to plcs
work,” he says.
For Barclays, this means invoice discounting deals where the client collects
the debt, as always, and simply gets advance financing on the debtor book. Walls
points out that this is a very comparable product to an overdraft in terms of
pricing. “I can’t remember when we last did a deal on this that was more
expensive than an overdraft,” he says.
The key thing about invoice discounting from the company’s point of view is
that it is wholly secured on the debtors book. As Walls says, in the worst case,
that means that even if something goes wildly wrong, at least the bank is not
looking to repossess the directors’ houses. However, Walls believes that at plc
level, invoice discounting is still a marginal product. “We have started to see
one or two plcs taking an interest.
But at the level down from the big FTSE plcs we are regularly seeing
businesses with a turnover in excess of £100m looking to invoice discounting as
a tool to finance the capital needs of the business,” he says.
Twice the pain
Walls points out that larger companies who do not take advantage of the ability
to raise cash on a sound debtors’ book are often losing out twice, once on not
having the benefit of the cash immediately available to them and again in not
being able to use the cash to take advantage of any discounts their suppliers
might be offering for fast settlement of their invoices.
“If a supplier is offering five or ten percent for payment inside a set
number of days, that is worth taking advantage of,” he points out. Anything
close to a 5% discount would probably show a profit on the cost of borrowing on
the invoice discount side.
Life is not likely to get any easier for companies over the next six to 12
months. So there is no alternative now but to tighten the belt, cut the
non-essential expenditure and teach the line troops the meaning of prudence all
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