IN 2007, when the American subprime mortgage specialist, New Century Financial, filed for bankruptcy protection, cut staff numbers in half, and sold on its debts to other banks, the global banking industry began its gradual collapse. The situation led to reduced liquidity in the global financial system, making credit terms significantly harsher for UK companies.
Some companies are still recording major losses, redundancies have occurred albeit on a smaller scale than expected, banks have been taken over and those considered too much of an economic loss have been nationalised. SMEs, being more susceptible to changes in economic activity, have increasingly found themselves under tremendous pressure to do more with less, especially as a new business landscape evolves.
Despite this, some of the well-run astute businesses found the silver-lining in the dark cloud and have been thriving in the harsh climate and are in control of their destiny.
Finance Directors, fortunately, have the advantage of working with diverse companies to deliver specific results based on clear company goals, spot trends, and use them to build a system of controls and improved financial performance. As an FD, there are issues that in my experience, companies should mark for attention whether survival or business growth is on the agenda, to ensure the company is better positioned to capitalise on market opportunities.
Financial health check: The periodic comprehensive review of a company’s financial position is necessary to identify possible areas for growth and improvement. What you have always done in the past, you will find, will gradually lose its relevance. Financial considerations usually hinder many businesses from growing and so an opportunity to address any obstacles to growth, especially in today’s climate is priceless.
Health checks are important not only in the event of an impending sale or change of ownership, they provide an indication of how healthy ANY business is and what changes can be made to improve processes, opportunities, profitability and cashflow. Find time to do it internally or externally, involve all to be effective. Most importantly, be thorough and have viable recommendations. Otherwise, what is the point of a diagnosis without a prescription?
Warning signs: Before a cashflow crisis hits, there would be red flags that may have been ignored or dealt with inefficiently. Every business needs to track and respond quickly to negative indicators.
Are there significant debtor balances aged beyond 90 days in your sales ledger?
Is your business on stop and do you have to purchase goods on a pro-forma basis?
Are you having difficulties in meeting your commitments to PAYE, NI and VAT with threats of fines and penalties?
Do you know which products and services make you money?
Are you getting pressure from your business bankers, factoring or finance house to restructure or reduce their facilities with you.
Do you have County Court Judgements (CCJs), any notice of impending legal action or complaints from suppliers over late payments and consequent breaches of business credit limits.
Are you out of cash even though your sales figures are increasing?
Are you working with the peaks and troughs of your business especially if it is in an established stage?
What have you done to address these issues and prevent a recurrence?
Generating cash internally and externally: Business secretary Vince Cable has recently announced that the government is to provide £110m in funding to peer-to-peer and alternative finance lenders in an attempt to boost lending to small firms. All sorts of new types of lending are appearing including crowdfunding, single invoice finance, pension fund loans etc. These alternatives to traditional funding are relatively easier to obtain than the conventional methods and are therefore more appealing to SMEs.
The purpose, time and cost of funds would usually determine the best funding option to consider. However, rather than be at the whim of external financiers or credit committees or even face the threat of extinction, management teams can strengthen their operational processes and financial controls to improve cashflow within the business.
Continuous monitoring: This is necessary in order to uncover any potential risk and compliance crises. Established businesses often become inefficient because poor “customs and practices” start to develop. Management teams need to focus on poorly implemented controls and weak policies and also test for inconsistencies or any possible collapse in financial controls. Operational procedures including credit control and expense claims processes need to be reviewed as well as any policy violations, missing data or documents.
Investment decisions: Creating a structure of a decision making process to represent the performance of an asset can help a company to forecast returns and make more informed decisions regarding a major investment. This mathematical model, when used is very valuable in guarding against risky decisions especially those concerning capital-intensive investments.
Reviewing contracts: What contract provisions and agreements exist between you and stakeholders including contractors, employees, investors and suppliers such as insurers and utility providers? What are the termination clauses? What is the length of each contract period and are there any clauses about automatic extensions with the caveat? What debt covenants have you negotiated? Watch out for deal busters. Don’t keep old terms existing forever. Be a savvy negotiator and assess any advantage you could use as your bargaining chip?
Do not assume you do not have bargaining power. Is there any compensation for ineffective customer service? Does your provision include details about performance goals and targets linked to your compensation formula where possible? There are certain things not worth bickering about, pick your battles, but where it makes a difference, cut the best deal possible.
For this group, emphasis should be on maximizing profitability and productivity and remaining laser focused on the drivers of cash.
Gary Jesson is MD of the e-FM Network. The company is a network of Finance Directors and specialists providing financial management services up to Finance Director/ Non Exec Director levels and has doubled in size in the last two years. For more information, email firstname.lastname@example.org or call 01582 516300/ 0845 129 9900
Ex-Wolseley UK FD joins company behind Very.co.uk and Littlewoods.com
Live webinar to take place on 21 February at 2pm
Pearson's CFO Coram Williams discusses company recovery and restructuring, and key plans for 2017
Ivan Fowlie was previously head of business finance for Western and Central Europe