• Posted on: March 11, 2014 by: mardle0312

    Overtrading? Then request more cash?

    With certain sectors and areas of the UK economy growing quite rapidly many businesses will be attempting to satisfy a growing order book without having the financial resources to do so.

    This will result in overtrading as their working capital becomes so stretched that eventually part of the financial supply chain will collapse leaving customers without their goods and services, suppliers without their cash and therefore liquidation could soon be the next course of action.

    So what can you identify in the financial supply chain that acts as an early indicator that cash is becoming scarce?

    Firstly payments of expenses/wages/salaries increase quite rapidly. This can lead to more orders being ‘won’ however to satisfy those orders one might need to commit to placing large supply orders on suppliers who themselves duly ramp up their ordering.

    Because of the terms and conditions of sale and purchase not being ‘measured, monitored or managed’ one might find that payments to suppliers are required before cash is received from customers.

    Then as services deteriorate or goods do not arrive, customers start to withhold payments.

    This is the cash conversion cycle at its ‘breaking point’ and when faced with such scenarios attempting to go to the bank, investors to obtain new funding arrangements could be a recipe for disaster.

    The solutions are numerous and it will be depend upon timing re seasonal markets, possible sector scenarios, attempting to negotiate earlier payment terms from customers, extending payment terms to suppliers, requesting more investment etc.

    Posted on: March 10, 2014 by: mardle0312

    Releasing trapped working capital is simply reviewing inefficient processes, whereas Working Capital Strategy is more about delivering an effective financial supply chain.  This means being proactive in areas from strategic alliances to delivering efficiencies in the cash conversion cycle.

    Working Capital Strategy checklist

    Ten tips when reviewing a strategy to achieve working capital optimisation:

    1.   Working Capital Optimisation programmes must extend beyond the finance function and engage the company’s entire managerial team.  Do not think that all working capital management problems can be addressed by treasury alone. Appoint local working capital strategy leaders/champions across the organisation.


    2.   Do not artificially adjust working capital levels through delaying payments to suppliers or indiscriminately stepping up collection activities in order to boost quarter- or year-end performance metrics.  In business, as in physics, every action is met with an opposite reaction.  Delaying payments to vendors may reduce working capital over the short term, but that improvement is likely to disappear over time as vendors adjust their pricing accordingly. Dynamic Discounting is now prevalent.


    3.   Incentivise people to achieve their WCO targets by compensating staff accordingly, particularly at managerial level. User driven key performance and risk indicators should be measure the underlying causes of DSO, DPO and DIO and steps take to monitor and manage findings.


    4.   Make a consistent effort to optimise working capital.  It may be tempting to take the focus away from working capital when the company is growing as there may be less immediate need for it.  Equally, in times of crisis, attention can be diverted elsewhere.  Ignoring working capital could significantly inhibit a company’s ability to grow and meet demand once business rebounds.


    5.   Ensure all hopes are not pinned on ERP implementation.  Although ERP systems can provide significant benefits in the working capital arena, in the near-term they can cause deterioration in working capital performance as key managers and employees are distracted from their daily routines and forced to fine-tune the new ERP system. Mobile applications are proving robust and agile.


    6.   Ensuring suppliers and customers are collaborating effectively is now very much to the fore in demand chain management.  Connect suppliers and customers across the enterprise to achieve maximum benefits.


    7.                  Provide added value for your suppliers.  Major organisations are now using web portals and the like to   deliver seamless accounting transparency for all their suppliers and their financial transactions too, wherever they might be in the world. Supply Chain Finance is now a major part of suppliers funding arrangements.


    8.   Do not allow debt to become overdue before identifying and resolving disputes.  Contact customers before payments are due to resolve any potential disputes and for delinquent payments, assign collection responsibilities to individuals and escalate the responsibility to more senior employees as invoices become further overdue. Have credit management as part of your strategy at Board Level.


    9.   Develop forecasting techniques that incorporate intelligence from all relevant business segments, including not just sales but manufacturing, distribution and marketing.  Evidence from these forecasts will assist in the production of company financial statements to investors re Companies Act 2006 as amended October 2013 re Strategy and Directors Report


    10. Look holistically at the whole financial supply chain.  For example, is there a direct correlation between inventory management methods and the level of customer service that a company can provide?  Do not allow one area to suffer as a result of focusing attention on another.

    Posted on: December 16, 2013 by: mardle0312

    How do you keep the cash flowing throughout the organisation?

    Investment, whether it is director’s cash, debt or equity in all their guises needs to be managed such that plenty of time is allowed to renew, curtail or extend the existing arrangements. If new funding avenues are being explored then even more due diligence and therefore more time is required.

    Looking at the Demand Chain (Customers- new, current and old/debtors/Potential markets) one needs to appreciate when cash will come to fruition from the existing backlog and how much is the pipeline for the next 3 months that can be classified as ‘low, medium, high risk.’ Asset backed lending via factoring or other avenues may need to be considered.

    Review of the Supply chain will reveal core suppliers and how to possibly take advantage of Supply Chain Finance, dynamic discounting and maybe even purchase of suppliers’ assets.

    The inventory (stock, work in process and reverse supply) chain is where cash can become a very subjective issue. How much is WIP really worth when it has not been invoiced for over 6 months or when stock has sat on shelves for over 12 months? In fact due to deterioration, stock holding and disposal costs it could be a cash outflow!

    Finally the Capex/R &D chain needs to be analysed to appreciate the tranches of cash required as these are normally driven by milestones.

    These 5 cash cycles form the cash conversion cycle and a full analysis will identify whether cash will be needed at any point in the cycle and at any particular point in time.

    Capex or Trade Debtor/Creditor?

    Deciding on a project approach has distinct advantages if looking at the tax benefits accruing to a UK business and if one has the cash in the business at the right point in time to fund a capital project.

    However the debtors and creditors on such projects need to be treated differently to the trade debtor/creditor (opex) group. Why? The commercial terms need to reflect the special arrangements of such projects re timescales, milestones and types of finance available.

    Regular reports that reflect the granularity of working capital by its principle 5 areas namely, trade debtors, trade creditors, stock, work in progress and the newly recognised capital expenditure programme is critical in delivering transformations in cash performance.

    These reports coupled with timely meaningful and user produced Key Performance and Key Risk Indicators can provide an early warning system that provides visibility to management of liquidity gaps (short term cash requirements like trade finance may be required) and funding chasms where negotiation of loans, covenants are required.

    Posted on: August 2, 2013 by: mardle0312

    Looking at your cash flow you note that there is a funding gap i.e. in four months you will need a further injection of long term cash. Your covenants could be breached or in fact your ‘loan headroom’ exceeded. How could you address that issue?


    a)      Establish the reasons for the funding gap and identify the long term impact on the business

    b)      Deliver a business plan that describes the options to the Board of Directors

    c)       Investigate sources of long term funding i.e. banking, shareholders, directors’ collateral, crowd-funding, venture capitalist, private equity etc.

    d)      Any disposal of parts of the business, capital assets or maybe intangibles (i.e. copyright) could be considered.

    With a 12 month financial budget and a management accounting rolling forecast that incorporates 9 months past and 9 months future cash flows from Trade working Capital a business can be sure of mitigating critical cash risks.

    The financial budget aspect delivers the demand and supply chain figures that can then drive the receivables, payable, stock and WIP figures that once analysed can then form the basis for the Trade Working Capital requirements with a focus on cash. One can also include capital expenditures to deliver a full Working Capital picture. The Budget for Trade Working capital could reflect the situation as agreed at the Budget Approval Date with ‘the situation’ reflecting expected dates of amendments to working capital initiatives.

    The management accouting rolling forecast can then deliver comparative figures that reflect the previous and the future 9 months cash flow with an emphasis on understanding trends, anomalies and possibly seasonal issues i.e Christmas or summer season trading.

    The rolling forecast for Trade Working Capital and Capex will need to be continuously adapted to any strategies that are expected to be delivered i.e. discounts in the sales and promotional areas, stock lines being amended, removed or increased, work in progress being invoiced differently and with regards to suppliers and supply chain strategies i.e. new PO term, new suppliers, winding down of supply lines or indeed the introduction of a dynamic discounting structure.

    Comparisons between these two approaches and the actual results, produced at least monthly, should provide Treasury and Board management with the picture with regard to whether ‘headroom’ is sufficent when looking at funding streams or if trade working capital targets need to be reviewed.