News - Midlands
Cash is King
BFS - Busy Fool Syndrome - flourishes best when the future looks rosy and companies open the throttle to grab all the business they can. In the headlong rush to meet demand from eager customers, companies often overlook the key question - where's the money?
That simple oversight can be enough to stretch a seemingly successful business to, and beyond, the point of no return. There's no getting around the fact that cash continues to be king and that cash flow management is every bit as important today as it ever was.
In recent years, however, there have been some significant changes in the way cash flow hiccups are ironed out and one of them could spell the end for the business overdraft. The use of assets to underwrite borrowings, providing what amounts to a self-renewing overdraft, seems obvious to people like David Totney, managing director of Birmingham-based Liquidity.
He believes that good cash management begins early - long before the involvement of finance firms like Liquidity. Quality purchasing is one of the keys to success, along with just-in-time supply and beneficial terms. "It's a soup to nuts issue that runs through every stage of the business," says Totney. "It starts with being aware of what your current position is and then knowing what the cash calls are going to be on the business going forward."
This process can be helped by the use of cash flow forecasts, which Totney maintains should be reviewed regularly to factor-in changing circumstances. Only in the final stages do firms like Liquidity come into the picture. "We fit in at the tail end of the cycle, after the company has either manufactured the goods or provided the service that forms the cornerstone of its business, and raised an invoice," he explains.
Asset-based lenders (ABL) will typically make an immediate advance of 75 to 85 per cent of the value of an invoice. "It can go lower, or higher, depending on the quality of the customer based and the nature of the goods and services provided," says Totney, underlining his message about quality purchasing.
Sounds simple and indeed it is simple, but this kind of discounting lubricates the wheels of business more than most people understand, by immediately releasing cash when it is most needed. KPMG partner Ian Greaves believes that most businesses keep a reasonably close check on their money - but makes the point that the large number of receiverships that persists in the UK means many don't, perhaps because they don't perceive cash flow as a problem until it's too late.
"Obviously cash flow management isn't the only thing that causes people to go into receivership - other things can have the same effect. A drop in the market, poor management, loss of a key customer, changes in legislation that might outlaw a firm's key product, could all contribute," says Greaves.
Cash flow forecasts can help, but only to a limited extent since they are so easily derailed. Any forecast of the revenue from London buses would have been wildly inaccurate following the July bombing campaign that rocked the capital, as would predictions of visitor numbers. Nevertheless he maintains that all business should have a forecast for the next 12 months - even if it has to be reworked to take unexpected events into account.
Greaves believes the secret of success lies in the preparation of unembellished forecasts and plans. "Don't fool yourself by preparing forecasts simply to persuade a financier to give you money. Do them as accurately as possible, and review them regularly - at least once a month. Use them as a management document," he advises.
He reckons that only the achievement of profitable sales ranks higher than cash flow, with the retention of key staff also towards the top of the agenda. "They are all linked," he insists. "Cash is just one part of it, but it can't be ignored."
This kind of planning is getting a helping hand from the IT sector, according to Jason Seagrove, a partner in the Nottingham office of accountancy and business advisory firm Smith Cooper.
Fast growing firms, or those emerging from management buyouts, have an urgent need for cash flow planning, but conventional spreadsheet modelling has its drawbacks, says Seagrove.
"However, there are now software solutions that provide greater confidence that at least the assumptions entered are properly reflected by the projections.
These packages allow actual data to be entered and the projections are automatically updated for any variances. In an environment where things change quickly, this is an essential tool."
It isn't just business issues that can cause a business to lose its way. Many small businesses, particularly owner-managed firms, can falter when personal problems strike the individual at the helm, according to Paul Finnity, a partner in the Nottingham office of corporate recovery specialist Begbies Traynor. "There are many triggers that can cause a cash flow crisis. Lack of financial awareness, divorce, death, and shareholder disputes - any of these can lead to difficulties which start a spiral into crisis, and the day to day pressure can push strategic thinking and planning to one side," he says.
He believes ABL is becoming the mainstream finance vehicle for many owner managers, largely because of its flexibility. It even has a useful role in the insolvency procedure, providing access to a source of cash while restructuring takes places or a buyer is being sought. Often this creates a platform on which a continuing funding relationship is founded.
He also reports that ABL is making headway into cross-border transactions - a trend also noted by Damon Walford, Midlands-based director of The Royal Bank of Scotland Commercial Services, a member of a worldwide association of factoring companies.
Walford says: "As trade grows even more global, so does our ability to meet the international debt requirements of our clients." There are more ways than one to skin a cat, however, and asset-based finance is not the be all and end all, as Larry Coltman, partner and debt recovery specialist in the Midlands office of international law firm Reed Smith, points out.
"Far too many businesses believe that simply manufacturing a product, or providing a service, is enough and that's often when their problems start," he says. "Having done a good job they find they can't get paid themselves, even though they are faced with having to pay their own suppliers and employees."
He recommends some basic precautions before doing business like checking out potential customers before supplying them with goods. "It still amazes me that so many people get conned," says Coltman. "There are plenty of rogues out there who are happy to take goods and services without paying for them." His second message is also simple: "Don't sit on overdue invoices. The longer you leave it before taking action the less chance you have of being paid."
Cash flow is such a problem that it frequently appears on the agenda for discussion by the Midlands grouping of TEC International, an organisation that has grown from the desire of small businesses to have access to a pool of expertise on which they can draw.
Each group has around 16 members - all chief executives - who discuss pressing business issues and learn from the experiences of their colleagues.
Bob Battye, TEC International's West Midlands chairman says: "We get together once a month and act like a think tank. In the afternoon it becomes more like a boardroom, with 15 brains working on a single issue."
That simple oversight can be enough to stretch a seemingly successful business to, and beyond, the point of no return. There's no getting around the fact that cash continues to be king and that cash flow management is every bit as important today as it ever was.
In recent years, however, there have been some significant changes in the way cash flow hiccups are ironed out and one of them could spell the end for the business overdraft. The use of assets to underwrite borrowings, providing what amounts to a self-renewing overdraft, seems obvious to people like David Totney, managing director of Birmingham-based Liquidity.
He believes that good cash management begins early - long before the involvement of finance firms like Liquidity. Quality purchasing is one of the keys to success, along with just-in-time supply and beneficial terms. "It's a soup to nuts issue that runs through every stage of the business," says Totney. "It starts with being aware of what your current position is and then knowing what the cash calls are going to be on the business going forward."
This process can be helped by the use of cash flow forecasts, which Totney maintains should be reviewed regularly to factor-in changing circumstances. Only in the final stages do firms like Liquidity come into the picture. "We fit in at the tail end of the cycle, after the company has either manufactured the goods or provided the service that forms the cornerstone of its business, and raised an invoice," he explains.
Asset-based lenders (ABL) will typically make an immediate advance of 75 to 85 per cent of the value of an invoice. "It can go lower, or higher, depending on the quality of the customer based and the nature of the goods and services provided," says Totney, underlining his message about quality purchasing.
Sounds simple and indeed it is simple, but this kind of discounting lubricates the wheels of business more than most people understand, by immediately releasing cash when it is most needed. KPMG partner Ian Greaves believes that most businesses keep a reasonably close check on their money - but makes the point that the large number of receiverships that persists in the UK means many don't, perhaps because they don't perceive cash flow as a problem until it's too late.
"Obviously cash flow management isn't the only thing that causes people to go into receivership - other things can have the same effect. A drop in the market, poor management, loss of a key customer, changes in legislation that might outlaw a firm's key product, could all contribute," says Greaves.
Cash flow forecasts can help, but only to a limited extent since they are so easily derailed. Any forecast of the revenue from London buses would have been wildly inaccurate following the July bombing campaign that rocked the capital, as would predictions of visitor numbers. Nevertheless he maintains that all business should have a forecast for the next 12 months - even if it has to be reworked to take unexpected events into account.
Greaves believes the secret of success lies in the preparation of unembellished forecasts and plans. "Don't fool yourself by preparing forecasts simply to persuade a financier to give you money. Do them as accurately as possible, and review them regularly - at least once a month. Use them as a management document," he advises.
He reckons that only the achievement of profitable sales ranks higher than cash flow, with the retention of key staff also towards the top of the agenda. "They are all linked," he insists. "Cash is just one part of it, but it can't be ignored."
This kind of planning is getting a helping hand from the IT sector, according to Jason Seagrove, a partner in the Nottingham office of accountancy and business advisory firm Smith Cooper.
Fast growing firms, or those emerging from management buyouts, have an urgent need for cash flow planning, but conventional spreadsheet modelling has its drawbacks, says Seagrove.
"However, there are now software solutions that provide greater confidence that at least the assumptions entered are properly reflected by the projections.
These packages allow actual data to be entered and the projections are automatically updated for any variances. In an environment where things change quickly, this is an essential tool."
It isn't just business issues that can cause a business to lose its way. Many small businesses, particularly owner-managed firms, can falter when personal problems strike the individual at the helm, according to Paul Finnity, a partner in the Nottingham office of corporate recovery specialist Begbies Traynor. "There are many triggers that can cause a cash flow crisis. Lack of financial awareness, divorce, death, and shareholder disputes - any of these can lead to difficulties which start a spiral into crisis, and the day to day pressure can push strategic thinking and planning to one side," he says.
He believes ABL is becoming the mainstream finance vehicle for many owner managers, largely because of its flexibility. It even has a useful role in the insolvency procedure, providing access to a source of cash while restructuring takes places or a buyer is being sought. Often this creates a platform on which a continuing funding relationship is founded.
He also reports that ABL is making headway into cross-border transactions - a trend also noted by Damon Walford, Midlands-based director of The Royal Bank of Scotland Commercial Services, a member of a worldwide association of factoring companies.
Walford says: "As trade grows even more global, so does our ability to meet the international debt requirements of our clients." There are more ways than one to skin a cat, however, and asset-based finance is not the be all and end all, as Larry Coltman, partner and debt recovery specialist in the Midlands office of international law firm Reed Smith, points out.
"Far too many businesses believe that simply manufacturing a product, or providing a service, is enough and that's often when their problems start," he says. "Having done a good job they find they can't get paid themselves, even though they are faced with having to pay their own suppliers and employees."
He recommends some basic precautions before doing business like checking out potential customers before supplying them with goods. "It still amazes me that so many people get conned," says Coltman. "There are plenty of rogues out there who are happy to take goods and services without paying for them." His second message is also simple: "Don't sit on overdue invoices. The longer you leave it before taking action the less chance you have of being paid."
Cash flow is such a problem that it frequently appears on the agenda for discussion by the Midlands grouping of TEC International, an organisation that has grown from the desire of small businesses to have access to a pool of expertise on which they can draw.
Each group has around 16 members - all chief executives - who discuss pressing business issues and learn from the experiences of their colleagues.
Bob Battye, TEC International's West Midlands chairman says: "We get together once a month and act like a think tank. In the afternoon it becomes more like a boardroom, with 15 brains working on a single issue."