Cash flow that’s right on the money

The dangers are all too apparent. Take the furore that erupted in May, when Asda sent letters to its suppliers outlining its ‘Pay Me Early’ scheme. This appeared to request a 12% discount from suppliers if the supermarket giant coughed up on time. While it turned out to be mistaken (Asda was talking about 12% APR on the interest), the suppliers’ reaction showed how sensitive they are to the perils of their position: of being increasingly squeezed by large and powerful customers.

The current state of the markets has hardly made things more comfortable. Cost pressures have forced those in commodities to consolidate, so packagers are dealing with large companies when it comes to sourcing raw materials, too. Just like the major customers, these big suppliers will do all they can to negotiate favourable credit terms, and they too have the muscle to back it up.

As the economy worsens, packaging firms are finding short-term cash harder to come by. Credit lines are being withdrawn or reined in by many of the market leaders in working capital funding, says Basil Bannayi, managing director of Close Asset Finance. Manufacturers have had to explore other avenues.

Beware a false dawn
Companies such as Timestrip, Stanelco and API Group have all recently reported dwindling pots, and had to resort to emergency measures to fill them. In May, foil and laminate producer API faced a cash shortfall that caused it to breach its banking facility limits. Despite reporting signs of a turnaround, it was forced to seek financial support from a major shareholder, before securing £8m through an open offer of new shares. It also considered a risky move to the Alternative Investment Market (AIM).

But cash is crucial. Even if profit and turnover show a business to be healthy, it doesn’t mean anything if there’s no money at hand to pay suppliers, rent, wages and loans. To avoid a potentially fatal shortfall, companies have to get proactive in tracking, chasing and calling in their cash.

The key factor in managing cash flow is ensuring those readies come in as quickly as possible. When dealing with customers, it’s vital to negotiate and clearly define payment terms up front. It is never easy to change pre-agreed payment terms with customers, says Bannayi, so it is very important to get this right at the initial negotiation stage.

Terms should include penalty clauses and clear lines of escalation for any potential problems, and be clearly stated in all written communication with the customer. It’s also essential to secure their acceptance in writing – something the Bank of England estimates only half of companies actually do.

Then it’s a matter of making it easy for the customer to pay. With the credit crunch and current market pressures, it’s vital that the business ensures it is top of the customer’s list when it comes to releasing payments, says Peter Buckle, head of receivables management at PricewaterhouseCoopers. This means doing the job properly, to specification and on time, so that there can be no room for legitimate dispute, and invoicing clearly, accurately and promptly – ideally within 24 hours of dispatching the goods. And when it comes to collecting the payment, be diligent.

Payment terms should be rigorously applied or enforced, says Bannayi, as any leniency will be exploited by debtors who tend to pay those who shout loudest. Deal with any excuses for non-payment as quickly as possible, and be firm but insistent. If the customer is seven days past the due date, take action – if you’re not getting paid, then someone else probably is.

One of the main blocks to healthy cash flow is the issue of credit. Income doesn’t contribute to the pot if it is tied up in accounts receivable or, worse, extended in credit to an unreliable company. Good credit risk procedures are vital, says Buckle. The business needs to manage credit exposure and credit risk to ensure it gets paid.

Credit policy must be decided at board level, and carried out with rigour. Credit checks cost around £30 from a rating agency, and should be run both for new customers and to monitor the creditworthiness of existing ones. This is one area in which packaging firms have a distinct advantage, says Nicholas Mockett of Europa Partners. The upshot of dealing with substantial customers, the likes of Procter & Gamble, is that they’re creditworthy, so getting credit insurance won’t be a problem. It’s in the interest of the credit insurer to find out if a customer isn’t good for credit. But that shouldn’t stop you doing your own research, he explains.

Inside information
There are various ways of doing this. The Register of County Court Judgements details six years’ worth of money judgements in county courts across England and Wales. Any past fiscal folly will show up there. The law requires that plcs publish average payment times in their directors’ reports, which can be ordered from Companies House. Then of course, there is the old-fashioned approach of dropping in for a visit; there’s nothing like seeing a customer’s set-up to determine if it is creditworthy.

But key to successful cash flow is to write everything down. Keep a cash-flow forecast, on a month-to-month or weekly basis, which will help account for fluctuations in the balance and predict cash-flow gaps. Similarly, a debtor analysis will enable you to effectively monitor all accounts receivable that are due and late. Both can help identify the need for evasive action – such as acquiring a short-term loan to plug the hole.

Of course, as banks get more precious about doling out cash, such loans are increasingly hard to come by. If you are suddenly faced with a shortfall, there are other options worth considering.

Possibly the soundest is invoice factoring, in which a third-party takes the invoice, pays you 90% of the sum owed immediately, and the rest minus its fee when the balance is paid.

Going to shareholders for money is a logical move, but should be undertaken with caution. As shareholders have a vested interest in the firm’s success, any cash won’t come with potentially crippling terms attached. But it’s critical to be careful with PR and planning. As the banking world shows, if the market senses a company is trying to get out of something desperate, the damage can be significant.

In April, mortgage giant HBOS sought to raise £4bn with a rights issue. Soon the share price had sunk well below the value of the discount shares, shedding £8bn from the value of the company.

An AIM floatation carries similar risks. The market, set up for smaller and growing companies, can be costly to join, and it works best with improving performance and a buoyant market. Again, perhaps not the best route in the current arena. Raising money by an AIM listing is likely to result in a dead end, says Mockett. Shareholders will be looking for returns, but you won’t be in a position to deliver, just scrambling to stay afloat.

Managing cash flow may not be straightforward, but a diligent approach may keep the pot full without call for drastic measures. You’ll also keep your suppliers and customers onside. Not only that, but being proactive with cash flow gives a clear commercial advantage over the competition. It definitely adds up.

AVOIDING A SHORTFALL

Warning signs
• You are taking longer than 45 days to collect payments from debtors
• You are extending lines of credit and worsening your exposure to key debtors
• You have an increasing amount of work in progress that is not billed on time
• Your bank balance is steadily reducing
• Your stock levels are rising while sales remain static
• Your business is largely reliant on one or two customers who are not paying as well as they used to
• You are increasing borrowings to keep the business running

Top tips
• Write a detailed cash-flow forecast
• Regularly measure actual performance against projections and forecasts
• Agree payment terms early, in writing
• Invoice accurately and promptly
• Monitor costs as closely as you monitor sales
• Check customers’ creditworthiness
• Do the job well, to specification and on time
• Remember: it’s not a sale until it’s paid for

Source: CLB Coopers

CASE STUDY TIMESTRIP
Smart-label maker Timestrip provides a pertinent example of how market forces can wreak havoc on a company’s cash flow, even if prospects for the business are looking rosy.

Back in April, the Hertfordshire-based company announced it was set to run out of cash at the end of May. It had a mere £440,000 in the pot, down from £1.83m at the time of its results the previous June. And this despite reporting solid progress in the year to December 2007, and a confidence bred of increasing repeat sales, and a strong pipeline of potential contracts. Sales in the first five months of this financial year, for example, had exceeded the entire sales for 2007.

It had recently signed a rolling three-year £1.5m deal with United Pet Group in the US for its labels, which reveal how long a product has been open or in use, and boasts contracts with WD-40 and Nando’s. The technology is also being trialled by Premier Foods on its Branston Pickle jars, and being primed for the cosmetic, pharmaceutical and medical industries this year. Hardly a wanting pipeline.

Yet the pot was empty, and the need to raise funds urgent. Chief executive Reuben Isbitsky blamed lengthy sales cycles, which had led to erratic short-term revenues. It decided to go with a rights issue. In May, Timestrip issued nearly 54m new ordinary shares, which successfully raised £1m, more money than it sought, which will be used to help secure the new contracts and licence deals throughout 2008.

Popular Articles