• Credit, credibility and credit ability in funding and managing working capital

    The perception is that credit is becoming dearer as banks raise their interest charges and their costs of servicing of any sort of credit and especially with regard to funding working capital.

    Why? Working capital can be manipulated by accounting techniques and is often not recorded accurately enough at the level of granularity required to satisfy lending/funding criteria

    The issue however is one of credibility. If one researches and reviews how credit is ‘scored’ and ratings arrived at one will find all manner of algorithm’s and so called justifications based on ‘hard choices’ namely numbers that supposedly portray your level of credit that is ‘acceptable’

    However the real level of credit should be based on ‘soft choices’, namely one’s ability to be able to regularly pay the required amounts for a sustainable period of time.

    How?

    Several steps should be taken by any business/organisation if applying for funding of working capital namely:

    a)      Understand the exact requirements of each funding amount i.e., is it to fund capex, Mergers  Acquisitions, disposals, restructuring, efficiency savings via technology spends, or to cover amounts of VAT, Tax or a bad debt etc.

    b)      One should arrive at a real DSO/DPO/DIO through analysing the trade debtors/creditors/inventory in great detail and applying any reserves in a logical and dynamic manner.

    c)       Deliver a strategy for Working Capital that embraces learning and development needs for all functions across the organisation/business to deliver cash.

    In conclusion one should be able to produce a document highlighting the above, so that the ability of the organisation/business to fund its obligations in a sustainable manner is clear for all to see.

     

    Posted on: May 27, 2014 by: CashPerform
    • Q)The Forum of Private Business claims that SCF should not be used as a cover for extending payment terms, as “it is a cost”. But wouldn’t receiving payment – through the SCF scheme – within 10 days rather than 60 mitigate, at least to some extent, the cost of that credit?

    A)The challenge for the ‘corporate’ is to identify the ‘critical suppliers’ and then identify a reasonable discount scheme ….but by company or certainly type of supplier i.e. logistics, marketing etc. This is poorly done by most corporates in my view as they do not value or ‘risk review’ suppliers properly.

    To apply a SCF scheme across the board can hurt the corporate and the SME as the margins of many SME’s are so small they cannot absorb a discount of any sort and if ‘included’ in the scheme they then find margins in the future decline and then go bust leaving the corporate without a critical link in the supply chain.

     

    • Q)Isn’t SCF a good thing for small suppliers, or does it depends on the type of solution and how it is used?

    A)Yes, as stated above PLUS credit is becoming scarce and very expensive per latest B of E reports and very little working capital  funding is coming through to small suppliers from banks.

    These small suppliers are now supported by a multitude of unregulated ‘funders’ from pension schemes to platform providers to crowd funders, to family members, to challenger banks to wealth management schemes….the list is endless but so much RISKIER for corporates to understand.

     

    • Q)Secondly, do you think that negative perceptions surrounding SCF might be hampering wider uptake, making it more difficult for corporates to on-board some suppliers? Are there any other factors at play here?

    A)As you say , wider uptake has ‘stalled’ by the ‘unregulated’ nature of the ‘investors’ to smaller suppliers and corporates are taking risks (hence credit insurance has risen dramatically and is ‘cheap’ compared to pre-crisis 2008.)

    The other factors at play here is the ‘quality of the invoices being used’ for the SCF process. With e-invoicing and other ‘checks’ NOT being implemented by UK business one has to ask the question ‘Is the invoice quality paper or toilet paper?’ In other words can it be validated? Can you ‘risk’ loaning money against it?

    This is reverse factoring abut factoring has specific safeguards that SCF has not yet covered.

    The next cash and credit crisis is just around the corner I am sorry to say as Charlie Bean (deputy Governor of Bank of England) pointed out in his exit speech over the weekend when he forecast interest rates rising sooner rather than later to 3%….six times their current level!!!

    Posted on: March 11, 2014 by: CashPerform

    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: CashPerform

    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: March 6, 2014 by: CashPerform

    Which finance provider should I use?

    A frequently asked question and one that requires a very lengthy solution although the following is a distillation of 8 years’ experience  and its simplicity never fails to surprise me as few ‘advisers’ undertake each category with the granularity and due diligence needed to deliver a reasonable conclusion.

    What is the organisations strategy and how does it relate to cash flow?

    Review sector, the market, aspirations of trading abroad, growth- organic and through diversification. Does ‘segmentation’ really mirror cash flows?

    What does the business model/operational plan reveal by way of cash ‘streams’ and the cash conversion cycle i.e. monthly DD, quarterly invoicing , contractual milestone payments, performance costs and revenues?

    What is the underlying performance of cash and how is it driven by KPI’s? Is working capital optimised and the interdependency of the demand/supply/inventory and investment chains fully understood and appreciated? Are people driven metrics linked to cash flow?

    What is the ‘risk appetite’ of the Board? Is it sustainable? Have external drivers been factored in via probability, scenario planning and risk mitigation?

    Conclusion.

    Once the above has been undertaken what sort of finance is required?

    Short Term – possibly reflecting efficiency or otherwise in the CCC

    Medium Term – is the operational plan reflecting the 4 ‘interdependent chains’ of WCO?

    Long Term – Is the strategy ‘wrong or right’?

    Narrative around the ‘providers of finance’ can now begin as one will understand ‘timing’ issues, it will identify whether opex, capex or M & A/Divestment  is required and the whole financial supply chain is now being, measured, monitored and managed.

    Alternatives, to traditional bank funding for working capital, requires due diligence

    With Basel III restricting banks credit facilities the tide of alternative providers is rising as they can deliver competitive costs of finance, pay as you go transactions, no charges or notice periods on the business, no personal guarantees, and are transparent to you as the customer plus your customer (the suppliers) do not need to know of your financing of their payments.

    If you have a cash conversion cycle that is both efficient and effective then alternative finance providers may be a good place to start rather than using personal mortgages, savings and/or credit cards but as they say ‘caveat emptor’ as due diligence is key.

    Furthermore one needs to fully understand your Weighted Average Cost of Capital (WACC) and whether current and future business trends will support such a strategy

    Posted on: February 21, 2014 by: CashPerform

    Credit Management and the DSO lagging indicator

    Recently, several credit agencies have elected to reflect their own and quite subjective view on whether a company has a good credit history and by taking other factors into account like suppliers scores they have generated ratings that portray, for example, good or very good credit worthiness.

    The DSO metric assists in an understanding of the tracking of debtors but does it really help to understand the organisations ability to pay its bills or support its customers on a sustainable basis?

    I suggest that one requires a narrative that explains how sales are generated, why cash may fluctuate and a fuller appreciation of the commercial terms of the business.

    Why Working Capital Metrics are calculated differently by credit rating agencies and organisations alike.

    Q1 of any new year sees a huge volume of organisations publish their annual reports. The narrative normally eludes to various cash metrics and in particular to working capital.

    However when one reads through these reports to establish a common but significant KPI like DSO, DPO or even DIO, they are not often found and instead other forms of cash metric are used but rarely explained as to why an alternative measure is being used, its relevance to the business its impact – maybe on bonus, maybe on remuneration or maybe on investment decisions.

    The likes of Marston Plc. suggest CROCCE, ITV profit to cash and Nestlé FCCF and yet none are ‘recognised’ by the usual credit agencies.

    Furthermore the agencies then compute DSO, DPO and DIO that does not conform to the usual accounting scenarios and rarely give a reason as to why?

    So when attempting to understand the cash conversion cycle or any working capital metrics one has to be very careful. As providers of such information we establish with the management team how to measure the real changes in working capital through the use of Performance Indicators (PIs) that are a subset of financial KPIs and are owned, measured, monitored and managed by operations.

     

    Posted on: December 16, 2013 by: CashPerform

    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.

    Posted on: December 3, 2013 by: CashPerform

    Yesterday’s crash of the credit card systems belonging to RBS and NatWest reveals a distinct lack of investment in IT systems since the crash in 2008.

    Your working capital could therefore be impacted.

    Lack of cash receipts and payments to suppliers could leave you with excess inventory and production line balancing issues. The redress could be through detailed analysis of your financial supply chain and notifying the relevant authorities whether it is banks, insurance companies and even your accounatnts.

    More importantly, maybe, is to communicate any issues to your own customers, suppliers and investors.