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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.
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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 Tenon.
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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
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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 Tenon.
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Riding the Storm
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Secantor November 2008 Newsletter
The banking system has been under substantial pressure over the past few months, but hopefully the corner has now turned and we are entering a more stable period with lower base rates which will allow the money markets to begin to operate, albeit at higher lending margins.
However, for many businesses this looks like the beginning of a potentially very difficult period. There is more evidence that the UK is in recession. Many business owners have not had to deal with such tough times before and are going to have to think carefully and take appropriate measures to weather the storm ahead. This article looks at some of the actions businesses should be taking now to maximise their chances of survival.
Information
To manage a business properly, information is needed and it needs to be accurate and timely. Management information takes many guises and it is important that the information is relevant and tailored to that business.
Forward looking information is probably more important than historical information in riding the storm. The most relevant sources are likely to be:
• Forward order book and/or sales prospects. This needs to be looked at frequently and action taken where necessary. What can be done to promote more orders? Can volume discounts be introduced, special offers etc? Are cuts in the workforce required, or reduced working? Can overtime be reduced?
• An integrated 12 month forecast including detailed P&L, balance sheet and cashflow. This will give the business a view of what the next 12 months looks like and how much cash it needs. It should be produced on a likely scenario basis together with some sensitivities to look at the cash implications if these occurred eg if sales fall or increase. The forecast should be compared to what actually happens on a month by month basis, identifying what caused the variances and should be revised as necessary.
• 13 week rolling cash forecast. This should be very detailed. It will give a view of short term cash requirements and can act as a tool for managing cash on a daily basis. This is essential if the business is tight for cash.
Historical information does play a part in managing the business. It enables the business to assess how it has performed in the past, and what has and hasn’t worked. Often though, it requires detailed information and analysis to enable conclusions to be drawn and corrective action to be taken. For example:
• Analysing profitability by individual product lines, sales channels, customers or types of business. This often produces many surprises but can help the business identify areas where effort and resources are being used ineffectively and help make decisions to eliminate or turn them around.
• Looking at individual cost lines to reduce overheads
•Key Performance Indicators (KPIs) can be extremely helpful in managing a business. In a straight forward training business for example, a KPI is often the number of training days sold or the number of people trained in a month.
Actions
Urgently review the information below. Some of the points are general housekeeping but in a recession it will be the tidy businesses that survive.
Sales
Where a business has many product lines, it is important to understand the profitability of each line. Some businesses find when they do this exercise that salesmen are actively selling the loss making or poor profit ranges and neglecting the most profitable. Understanding the margin on each item allows the company to consider whether to keep the product as a loss leader, increase its price or stop supplying it all together. Thought also needs to be given to the resources (human, cash, effort) involved in generating sales of various types, so that effort is concentrated where most volume, profit and cash can be produced.
It may also be worth reviewing sales and marketing methods and consider targeting customers who have not recently bought with special offers or other inducements, though make sure the sales are profitable and introduce quantity discounts or early payment discounts. Make sure credit limits are in place for customers and stick to them. Review all old ones as well.
Costs
Reviewing staffing levels is essential; don’t carry any unnecessary baggage in this area. Take into account though that redundancies could cost the business cash in the short term.
Look at purchasing policies and consider renegotiating with suppliers (biggest ones first!) or seeking new tenders. Look at payment terms as part of such an exercise - they can easily get missed.
Balance Sheet
Balance Sheets are fundamental in any review process. Working capital is probably the first place to start. It is made up of three elements (debtors and stock, less creditors) and represents the amount of cash tied up in the actual trading of the business. Minimising working capital also reduces cash tied up in the business.
Stock
The reduction of stock usually requires a detailed exercise to be carried out. Some points to consider:
• Can stock levels be reduced in particular areas? Check stock turn.
• Can obsolete stock be sold or used, perhaps by heavy discounting? Selling obsolete stock may generate a book loss, but this is only accounting recognition of the fact that it’s not worth much. It is probably much more important to release the cash tied up in it.
• Can the product range be rationalised?
Debtors
Collecting cash is important for any business and the objective of a sale is not achieved until the cash is in the bank. Businesses need to understand what is causing delays in debtor collection.
• Are payment terms properly negotiated with customers, and enforced?
• Are inaccurate invoices a problem, giving customers an excuse not to pay?
• Does the timing of issue of invoices mean that they miss a customer payment run?
• Is the credit control function effective and well-managed?
• Beware customers who have not used you for a while. It could be they can’t get credit from their usual supplier.
• Are customers telephoned before a payment is due to check it has been scheduled and to allow any problems to be resolved?
• Are any retentions being collected?
Creditors
The final element of working capital to consider is creditors. It is important to remember that the liability for a purchase usually arises when the order is placed and so procedures may need to be reviewed to ensure control is exercised over all orders.
Creditors need to be kept happy enough to ensure continuity and reliability of supply – but no more than that!
• Ensure that favourable payment terms are a central part of negotiations with suppliers.
• On large sales contracts, try to align payment terms to suppliers with those from the customer.
• Ensure invoices are thoroughly checked.
• Try to establish a routine for payment of major suppliers so they are paid consistently – just as your customers pay you!
Remember that supplier payments are a difficult part of a cash flow forecast – you can delay some payments to help you through a tough spell, but you will have to catch up later and that will hit cash.
Cash and funding
Above all, remember that ‘Cash is King’ and that liquidity is essential for survival (just as has recently been the case for banks!). Concentrate on cash generation and retention before profitability – the establishment of a good cash reserve, and properly agreed loan facilities where necessary, will enable many a storm to be weathered and give you time to resolve problems. If you are short of cash, or dependent on an overdraft which can be withdrawn, then a relatively small and temporary trading difficulty can quickly become much more threatening.
Review your funding position as a matter of urgency. Put term loans in place where they are more appropriate than overdrafts (i.e. where borrowing is long-term rather than for temporary fluctuations). Consider bringing in new equity if you have confidence in the business – now is not a good time to be highly-geared. Remember that it will be almost impossible, in the current climate, to raise funds externally when you’re in trouble, however temporary.
Finally
The above actions are an indication of some of the things a business should consider. The specifics will depend on the business and how it operates and in what sector. To maximise cash and profits in a recession requires a good understanding of the business and how it works. This takes time and resource but the results can be significant. Secantor provide experienced FDs to work with companies on a project basis to assist with such exercises.
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Exploring All Options
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Despite the current economic climate, the banks are still willing to lend money to corporates, provided the business has a sound business plan and the level of gearing is moderate. Deals are still getting done, but at a slower pace, higher price and at lower volumes. The liquidity issues remain for the banks. They clearly have concerns about the economic outlook and how this will translate into increased levels of bad debts. Also, despite the Government re-capitalisation of certain banks, there are still bank to bank lending issues. As a result, the banks continue to ration lending and this is likely to continue for at least the foreseeable future. Corporates need to react to the trends in the market and perhaps consider how they need to alter their financing arrangements going forward.
More Club Deals
One way in which a corporate could secure funding for their strategic growth plans is obtaining funding for two or more banks (“club deals”). It is likely for larger acquisitions that club deals will be the most likely funding structure given that the syndication market is almost at a standstill. Banks are unlikely to want to underwrite the entire credit risk on larger deals and the banks will be keen to spread their risk. Even for general funding (e.g. working capital) we see that bank clubs will become increasingly popular as incumbent banks may not have the appetite to extend or continue existing funding lines.
Increased Pricing
There has inevitably been a push back on the more favourable funding terms available in 2007 and early 2008. Banks are increasingly focussed on achieving the right returns on capital (particularly following the introduction of BASEL II) and in the current market this has meant higher pricing and shorter lends. On the acquisition finance side, this has also affected the amount at which the banks are prepared to lend on a cashflow basis (three times EBITDA seems to be the maximum). Deal structures have also been affected (for example vendors having to defer more consideration fully subordinated behind the bank than they previously did).
The banks are also more interested in the over-all returns they receive from their relationships (e.g. through ancillary facilities, hedging etc). It is also likely that facilities which are available but not being drawn may be withdrawn unless the bank recovers through significant non-utilisation fees or is happy with its over-all return from its relationship.
With regard to hedging, many businesses are currently having to pay fixed interest at well above market rates under hedging investments entered into over the last couple of years when LIBOR/Base Rate was much higher. In some situations such hedging investments can be re-structured to the corporate’s benefit, but this is not always possible. There is though, a “flipside” to this – with interest rates at historic lows, now is a good time to take out new hedging terms.
VC Funding
There is still some potential in the market for venture capitalists to fully underwrite acquisition finance deals without bank funding being in place on completion. The venture capitalists are only likely to provide this “equity bridge finance” if they are comfortable that they can refinance with the bank later or (less likely) the venture capitalist is happy to provide longer term debt. In any event, this deal structure is only likely to apply to certain deals and for most other deals, debt funding will need to be secured on completion.
Asset Based Lending
Credit constraints have made it increasingly difficult for the corporates to obtain finance from traditional funding methods. It is likely that the asset based lending industry will continue to provide an important role in supporting businesses during the recession. To secure finance, businesses may need to speak to asset based lenders to obtain funding (either alongside its incumbent bank or as its sole funder).
Dialogue with Banks
In conclusion, funding is still available for businesses provided they have a sound business plan, albeit that it is likely to be at a higher price and on less favourable terms. Businesses should consider whether to bring another bank on board as well as their incumbent bank, especially if the incumbent bank does not have the appetite to extend or increase the current facilities. This is also relevant even in relation to syndicated facilities, where corporates may consider bringing bilateral facilities alongside to give more flexibility.
More than ever, corporates need to be speaking to their banks and other funders, well in advance of their facilities coming to an end, in order to ensure that future funding is in place. Finance directors need to be sure that they produce management accounts, cash-flows and forecasts in a timely manner and ensure that those are based on reasonable assumptions. If a business is showing signs of struggling it is far better to begin a dialogue with the bank at an early stage rather than leaving it too late, which may reduce the bank’s options. An early stage dialogue will allow the bank to consider a wider range of options (e.g. re-setting financial covenants, debt/equity swaps etc). A constant dialogue with the banks will only assist corporates in the future with obtaining funding.
Author
Shaun McCabe is a member of the Banking Team at Browne Jacobson
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Informed decisions are key to business survival
There has been some informed talk of UK PLC being at the bottom of this current recession, indeed house prices have risen for three out of the last four months.
Is this the end of the troubles or is it merely a blip before another leap into the abyss?
I might not have the answer but what I do know is that there are plenty of things businesses can do to insulate themselves from the current economic climate.
Never had the adage that cash is king been more appropriate. Businesses do not go into liquidation because they are not profitable, they go out of business because they have simply run out of cash and cannot pay their debts.
You should tighten up on credit control. Do not be afraid of being strong with your debt policies. If your customers are making excuses and not paying, talk to them and come to some arrangement to settle in instalments.
Cash is the life blood – no cash, no business.
Sales are absolutely paramount. Lots of businesses look at costs in difficult times and seem to forget about sales.
Marketing should be key to your overall strategy. You need to let your customers and, of course, potential new customers know that you are still around and open for business. Do not stop marketing altogether, although you may of course need to refine and adjust your strategy to suit the climate.
Sales for sales’ sake – turnover is vanity and profit is sanity. We have all no doubt heard these mantras and there is a good reason why we have probably heard them… it’s because they are true.
There is no point in making a sale that does not make the amount of money you need to cover your costs and make a profit.
Check your pricing – do you need to reduce or increase your prices?
Unless you have gone through the exercise of looking at your margins and contribution levels you will not know the answer to the question and could end up making completely the wrong decision.
Of course, costs should be looked at. But you can only shave so much off your costs and once you have done this you should go back to concentrating on cash, sales and pricing.
There are many, many things businesses and their owners can do in a difficult market to protect themselves and their businesses.
If there is no management information available to make the key decisions, then the business and the business owner could well be making fatal decisions.
To finish on a positive note, those businesses that do have the information and systems to help them make informed decisions are the businesses that will be around in 12 months’ time – maybe not fitter, but certainly leaner, more sytemised, more process-driven and ready to flourish as the economy moves back towards equilibrium.
Neil King – Cedar and Co.