Making Money in a Downturn
Business trading is probably not running as smoothly this year as it was this time last year. What do you know that can help you to decide what action you should be taking?
The sooner you make changes, the better chance you have of continuing to make money.
“Cash is King” …….. focus on your working capital. There are many routes you can follow to make sure you survive and are ready to grow again.
If your borrowing is getting too high for the bank you need to know ways to reduce it. Big ticket product or service sales may be at higher risk in a downturn than small ticket sales.
Some simple tips:
Internally :
1) invoice promptly and chase debtors
2) sharpen up delivery to your best customers, you need to retain them
3) review all costs
4) reduce stock
5) defer capital expenditure
Externally
1) talk to your customers, know what is happening in your market place
2) talk to your suppliers, agree extended payment terms if possible
Is cash flow dictating strategy? Short term cash problems can be solved by capital injection, giving the business room to develop and making the bank more comfortable.
If you do not have sufficient funds to inject yourself to make a difference, investors are still looking for businesses that are historically profitable, with a good management team, operating in growing markets with good margins and good spread of customers.
Spot the warning signs early:
• Debtor days increasing
• Reducing profitability
• Increasing working capital requirements / bank borrowing
• Are you holding back payments to creditors? … are they key suppliers?
Do not let financial management information get behind, if anything you need more information sooner, and keep your bank advised. You are more likely to get support from a bank or an investor if your management information is detailed and up to date.
Most of all keep talking to your funders, they do not like surprises!
Some people are already expecting next year to be tougher than this year.
Call for Help sooner rather than later !
Article provided by Steve Blount.
Organising your Finance in the Crunch
When George Sampson emerged as winner of “Britain’s Got Talent”, picking up a cheque for £100,000 in the process, he delighted the nation not only with his performance but in pledging to pay off his mum’s mortgage. It was a wonderful gesture, and no doubt many people allowed themselves a moment of bliss imagining a mortgage free existence.
Sadly few of us will ever be in the fortunate position of having a wealthy benefactor stepping in to pay off our debt, and fewer still when it comes to our businesses debt.
Cash is the life blood of business and having the right kind of financing in place is an essential part of managing cash flow. It is important to regularly review the finances of your business and plan well in advance for renewal of facilities or new projects and major expenditure.
Consider carefully the nature of the funding required. When purchasing a new asset such as a motor vehicle or piece of plant then HP or a finance lease are likely to be most appropriate, however, if it is a high value asset with a long life, such as a property then a mortgage or other long term borrowing will be required.
If funding is more short term and fluctuating with spikes, such as when quarterly VAT payments fall due, an overdraft may well be appropriate. However, if you are looking to fund growth something more flexible, such as invoice financing, could be a better option as the facility automatically grows with your turnover, unlike an overdraft, and provides more predictable and improved cash flow.
For a new venture or major expansion equity finance, the issuing of new shares to either yourself or outside investors, should also be considered. This does not saddle the business with debt and interest charges, giving it a solid, long term base to build growth. And it will also enhance your chances of success in raising finance from lenders who not only in see a firmer financial foundation for the business but also that you are making a long term commitment and incurring person financial risk.
The credit crunch is likely to continue for at least a year or two and so it will remain difficult to obtain and even renew financing. However, funding will still be available providing you have a sound business case; lenders will be looking more closely than ever in assessing proposals so it more important than ever to have a proper business plan prepared based on realistic assumptions and clear thinking.
A good business adviser will be able to help you prepare and present your business case and introduce to a number of suitable lenders; offerings and costs will vary so it makes sense to compare a number.
In summary, consider the nature of your financing requirement; is it long term or short; how flexible does it need to be (is it a one of large item of expenditure or an ongoing, fluctuating requirement); do you want a structured repayment term; what are the related set up and ongoing costs; is equity a viable and suitable option.
Topical Tip
Finance will remain more difficult and costly to obtain than in the recent past but it is there. Prepare well and prepare early, leave it too late and you risk being left with a costly and unsuitable source of finance, or even worse, none at all. Be like George, have a well choreographed proposition and you to can be dancing for joy with your finances sorted.
This article was provided by James Kelsey of Tenon.
Is private equity the answer?
Is the credit crunch beginning to bite for businesses?
Are you having to watch your cash flow very closely?
Banks are keen to say that they are still open for business to lend to companies with a good record, that have adequate security to offer and can demonstrate that they can meet the interest and repayments.
For day to day working capital many companies have invoice discounting arrangements that are flexible with the ups and downs of monthly sales, working on an agreed percentage of cash made available against invoices due.
However if the bank says …. “no more” …. there comes a point for many companies when the bank can go no further, yet the business needs more capital.
Best not to wait until you have an immediate need for cash. Talk to your bank, find out how close you are to that point, you will need time to put in place alternative funding.
If there are good prospects for profitable growth then private equity may be the answer. Whilst this means giving up some shares in your company to the investors there are some strong benefits for the business:
• Provides a longer term solution and demonstrates commitment and belief in the business
• Provides cash for the business by way of equity and perhaps also loans
• Brings a focus on growth
• Brings expertise to the boardroom and added control to the business
• Improves the gearing of the company and is likely to enable the bank to lend more in the future
Investors back the management team. They would want their money to be used largely to grow the business and would be supportive and challenging to that end. Their objectives are to increase the value of the business with a view to an exit in 3/5 years.
Businesses usually need more capital as they develop.
Call for help sooner rather than later to prepare the case for investment in your company.
This article was provided by Steve Blount of CMR
Sell, acquire or merge?
What have Lehman Brothers, HBOS and Manchester City got in common?
All three have recently been taken over; Nomura buying Lehman Brothers and Lloyds taking over HBOS following financial crisis at both. Abu Dhabi United Group have purchased Manchester City who are not themselves in financial difficulty but their previous owner, former Thai PM Thaksin Shinawatra, is facing accusations and potential financial problems of his own.
Now all of these are big businesses, two of them multi-billion pound banks whilst the Manchester City investment runs into hundreds of millions of pounds in the initial purchase and subsequent funds being pumped into the club, but it is not only large enterprises that can benefit from a takeover or merger.
For many businesses the current economic climate is presenting difficult trading circumstances and sadly this will threaten the existence of an increasing number. Tight financial control, cut backs on spending and rigorous credit control are the principal tools businesses will turn to in order to weather the storm but a strategic decision to either acquire or be acquired may also represent the best opportunity to not only survive but emerge stronger.
Clearly this seems most beneficial if you are the acquiring party, particularly now. Identify a business which is finding things tough, needs some additional finance but possesses something highly attractive to you; their client base, geographic market, services or products which dovetail ideally with your own, plus the opportunity to benefit from economies of scale and reduce the overheads of the acquired business. And in all likelihood it can be snapped up for a bargain price.
But what if it is your business which finds itself in a vulnerable position? Can this still be an attractive proposition?
It can if you take control of the situation, and do so early, when the business is still financially viable and able to continue independently. Look at the strengths of the business, think about what would make it attractive to others. Seek out businesses that not only have the resources to secure your financial position but fit well with your own beliefs and philosophies. Approaching them with a proposition, selling the benefits you can bring to a combined business and setting out realistic, plausible reasons for seeking a merger may not exactly put you in the driving seat but will place you in a far stronger position than waiting until the situation forces you into a sale or even administration.
And this is, perhaps, a rare opportunity for a genuine merger to take place. Generally speaking there is no such thing as a merger, one business always emerges as the dominant partner absorbing the other into itself; there be some concessions made to give the appearance of an equal partnership but ultimately the end result is a take-over.
Where previously two (or even more) businesses may had no appetite for merging or acquiring, (whether because one lacked resource to purchase the other, fears of job losses in a combined entity or a whole host of other, very real and valid reasons not to do so), there may now be common ground to come together and build one leaner, financially secure entity in a genuinely even partnership rather than continuing as separates ones with uncertain futures
Topical Tip
No take-over or merger should be entered into lightly; it is possibly the most significant decision you will ever make in your business but with tight credit and finance conditions set to continue for at least the short term it does pose a viable option for both growth and securing the future which should not be discounted. The key lies in acting early; identifying your strengths, values and objectives in order to identify suitable partners to approach from a position of strength.
This article was provided by James Kelsey - Tenon.