If studying the balance sheet isn’t your favourite pastime, you’d better make it so as cash flow will be the difference between success and failure next year. Marc Barber finds out the most effective ways to stay in the black

If studying the balance sheet isn’t your favourite pastime, you’d better make it so as cash flow will be the difference between success and failure next year. Marc Barber finds out the most effective ways to stay in the black 

1. Conduct credit checks
‘It’s difficult to understand in real time what a creditworthy customer is as things are changing at such a fast pace,’ says Martin Port, managing director of vehicle and tracking specialist Masternaught Three X.

You only have to look at the Lehman Brothers website to see how quickly the mighty can fall. Scott Nursten, MD of security systems provider s2s, now uses an online service to keep an eye on the credit status of clients.

‘If anything happens to a company, like a change in directorship or an address, or its credit rating slides, our accounts department gets a warning email straight away.’

2. Acknowledge the problem
If sales are drying up left, right and centre and debtors continuously trot out excuses for late or non-payment, you need a contingency plan.

Andrew Duncan, a partner at Bridge Business Recovery, says: ‘People often
don’t recognise or aren’t prepared to accept their own businesses are in trouble. They won’t hold up their hands and admit they need help.’

Evette Orams, a director at Hilton-Baird Financial Solutions, agrees: ‘The real mistake is to act too late. There is so much negative press about the credit crunch that people don’t know what to do.’

The trick is to look at existing funding arrangements and your credit control. Often, a business can be its own worst enemy. ‘We have come across situations when orders have sat on a desk and the invoices haven’t been raised,’ says Orams.

3. Secure favourable payment terms
Late payers are effectively using your business as an interest-free overdraft. That has to be dealt with head-on. Fiona Hotston Moore, managing partner at accountancy firm Mazars, observes that ‘cash flow is the biggest issue for clients’. She urges companies to change their payment terms, speeding up the cycle for settling outstanding balances from 30 to 14 days.

That won’t be straightforward when others are playing the same game. Nursten at s2s
has allowed, in certain instances, better payment terms for his debtors while also being upfront with creditors.

‘We have negotiated the extension of the terms [for paying some suppliers] to 45 days,’ he explains. ‘Technically, we haven’t needed it as we haven’t been in trouble, but as we’ve adjusted terms for our customers it makes sense to speak to suppliers. It gives us the necessary breathing space – what you don’t want to do is wait until you can’t pay your suppliers and then call them to say there’s a problem.’

4. Don’t overtrade
Ambition can be as much the undoing of a business as the making. Hilton-Baird’s Orams says: ‘In the current climate, owner-managers are mistaking profit for cash flow, thinking because they’re profitable, everything is okay.’

Bridge’s Duncan recommends that companies ‘concentrate on existing clients. Going for new business may not be the answer as you may win a new order without being able to fund the capital cycle. Overtrading is a big problem for many businesses.’

Andrew Brimson, director of IT company Khipu Networks, concurs: ‘We have turned business away if we’re unsure about whether or not we can deliver. You have to be cautious.’

By equal measure, Port stresses the importance of positive thinking and driving the business onwards. This can mean getting smarter about how you sell. Masternaught has started to offer free trials for its tracking solutions to hook new customers. ‘Whatever business you’re in, you need to think about managing the costs and diversifying. You need to get out there and make sales – you can’t sit in the office looking at the four walls.’

5. Forecast your cash flow
Examine your working capital cycle and reconcile the debtors and creditors on your bank statements; decide exactly what payments should be coming in and going out.

‘You have to create decent, robust forecasts to identify what the critical payments are,’ says Stephen Fern, a director at turnaround firm LC Corporate Strategies.

Martin Bennison, MD of Bibby Financial Services, observes: ‘It’s easy to be an FD when you’re making money, but they tend to earn their corn when things aren’t going quite so well by taking steps to safeguard the security of the business.’

At s2s, Nursten claims the balance sheet is scrutinised with a clinical eye. ‘We’ve always been exceptionally paranoid about cash. My brother is the accountant and he prepares a cash flow statement with a ten per cent variance on it that shows the exact days we are expecting to get paid by our customers. We forecast 90 days in advance.’

6. Remember the essentials
There are certain organisations you don’t mess around with, not least HM Revenue
& Customs. Likewise, paying utility bills is probably a wise move. Prioritise the balances that have to be settled to keep your business viable.

‘Be forward-thinking in your discussions with the HMRC. Don’t hold off on telling them about your financial situation if you are going to struggle to make payments,’ says Hotston Moore from Mazars.

Devise a repayment strategy that you know you can stick to come hell or high water. ‘It’s a case of being realistic about the payment terms you are proposing,’ says LC Corporate Strategies’ Fern.

7. Order on demand
Horror stories abound about seasonal businesses getting caught out after over-ordering stock. Richard Sanders, a partner at Catalyst Corporate Finance, notes that ‘in many cases, 80 per cent of sales are derived from 20 per cent of the product range’.
If cash flow is tight, analyse the inventory and sell or offload what you don’t need. Moreover, conduct a cost check of suppliers to see whether items can be sourced more cheaply.

‘Look at the stock,’ urges Hilton-Baird’s Orams. ‘A lot of businesses sit on stock which could be used to generate cash.’

Khipu’s Brimson says the company is cautious about only stocking what’s necessary. ‘When an order comes in, we know what the lead-time is on any bit of equipment. I relay that to the customer so they know what the time frame will be. We order on demand so there is no risk of overstocking.’

8. Hock your wares
Desperate times call for desperate measures and that’s causing a resurgence in pawnbroking. Paul Aitken has set up Borro.com, which allows people to get a quick cash fix against goods. He says owner-managers, consultants and city financiers are queuing up to put their goods into hock.

‘They see it as a short-term solution to a payment issue while in the process of restructuring their finance,’ claims Aitken.

Among the items brought in so far are Ferraris, Bentleys, a yacht, jewellery, and fine art (including a sketch by Picasso). Aitken notes that people should probably use a bank overdraft or credit card if they can, ‘but for people who can’t, there are real alternatives’.

9. Invoice accurately
Mess up an invoice and you’re giving your debtor a gilt-edged excuse to delay payment.
Bridge’s Duncan recommends a follow-up call as soon as an invoice is sent to confirm its accuracy. ‘This means you can chase the debt properly without any dubious queries being raised at the last minute,’ he says.

10. Diversify
In an ideal world, you want a spread of clients across a range of sectors. The nightmare is to rely heavily on one or two clients who then revise their budgets and pull the plug on you – or can’t actually pay up.

That’s easier said than done, as s2s’ Nursten can testify: ‘What we have tried to do is steer clear of verticalisation [focusing on a specific sector] for as long as possible. You do get to a point where critical mass determines that you have to be targeting verticals.
Thankfully, we haven’t targeted financial services even though we are a security business.’

11. Consider asset-based lending
Split between asset finance, factoring and invoice discounting, commercial finance can be a useful tool to get cash flowing.

Bibby’s Bennison observes that he has seen a ‘marked upturn in enquiries’ during the past few months. ‘We’ve seen it before in the late 80s and early 90s when the banks weren’t keen on putting money out the door, but there are still good businesses out there which you want to support.’

Funds can be raised against business assets, such as plant machinery in a factory, or even stock. If you opt for invoice factoring, this allows the service provider to take on and collect your debt, paying around 85 per cent against the outstanding balance. A service fee is charged and the remaining 15 per cent is settled when the debtor has paid up.

You may prefer to go down the invoice discounting route. This allows you to raise the same funds while keeping the credit control and relationship management element
in-house.

Khipu’s Brimson foresees the business growing next year and is considering some form of asset-based lending. ‘Next year, we may look at invoice financing because as our company has grown our deals are getting bigger. There are a lot of interested financiers out there and their terms seem flexible.’

12. Put people on stop
There can’t be many shops in the high street which allow customers to walk out with whatever has taken their fancy with the words, ‘I’ll pay you later.’

That’s effectively what businesses are doing when they continue to provide a service or supply a product without payment. So the solution, if only until they pay up, is to pull what you’re doing. ‘Don’t be afraid to put people on stop,’ states Bibby’s Bennison. ‘If they’re not paying you, then why are you doing the work?’

13. Tone at the top
Perks and incentives to ensure the company culture stays strong are one thing, but
boozy lunches, luxury cars and trophy secretaries are another.

Duncan at Bridge Business Recovery recalls being called into a company where a vendor-initiated management buy-out went belly-up because the new management team preferred to put pleasure before business.

‘The owner wanted to step back and sell the company to the management team. In theory, it was a sound idea but they were more bothered about playing golf and driving nice cars than making the company a success.’

14. Invest for the future
At s2s, Nursten and his team have gone through a ‘process review meeting to assess every part of the business’. This isn’t to be confused with wielding the axe. Rather,
it requires that you assess what’s surplus to requirements.

‘I’m looking at where the business can improve its performance and I will make investments if necessary so that jobs can be done quicker,’ says Nursten. This includes improving the food on offer for staff in the office kitchen.

‘I’ve now increased the amount and variety of food and I’ve done that purely to keep people in the office longer. They have everything they need here so I’m saying: “Don’t take your lunch break [outside] as I need you here working.”’

Masternaught’s Port insists that you shouldn’t ‘stop some of the nice things in the business’. He says: ‘We recently handed out £22,500 and half went to Cancer Research and half went to nine employees who had stopped smoking for six months.

‘We could have said we can’t afford to pay or we’re stopping the scheme, but you’ve got to keep the positive things in your business. You may have fewer people but you can do more with the ones you have to keep them motivated.’

15. Take out insurance
If there is a make-or-break payment for your company, it could be worth seeking insurance against late payment (usually longer than six months) or a customer going into administration. This can be offered as a form of protection when going for an asset-based lending package as well.

16. Work smarter
Redundancies aside, you can try to reduce the amount of hours staff work or have shutdown periods between big orders.

Technology also has a role to play. Mark Hall, managing director of media agency The Big Oxford Computer Company, uses a web-conferencing application to conduct more meetings online.

‘We’ve used the product since July and have saved a considerable amount on
travel; plus, we get regular feedback from clients as we can be more collaborative
on projects.’

17. Tread carefully
The mood is such that some companies will be firing county court judgments (CCJs) off at the first opportunity. For Nursten at s2s, it’s better to try and understand the customer’s situation and work at a solution, such as a series of part payments.

‘People can be too quick to raise a CCJ,’ he says, although he accepts there comes a point when legal action must be taken. ‘There will be a last resort and then you have to go to the debt collection agency and let them do their thing.’

18. Keep the bank informed
Forget the friendly ads that used to fill TV screens. Banks, which have always been the most profit-centric of organisations, are taking no prisoners when it comes to loans and overdrafts.

You need to demonstrate that you are close to the numbers and understand your cash flow. Trevor Nobbs, associate director of Barclays’ business support team, says: ‘It never ceases to amaze me the number of businesses which seem to almost think they do not need to produce much in the way of management information, or that it is [solely] produced to keep the bank happy.’

While too much importance can be put on key performance indicators (KPIs), they provide a heatmap for the business. Says Nobbs: ‘In this fast-changing world, each business should consider KPIs. These will vary according to the business and your accountants and bank should be able to provide you with input on what you need to measure.

‘KPIs will often be sales-related so you can react and make decisions quickly to maintain the supply of the right product at the right levels and to monitor your key variable costs.’
The point is that no one wants a business to fail and options are available to turn things around when the going gets tough.