• 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.


    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: June 17, 2014 by: mardle0312

    Cash, Credit, Capex and Culture via Communication

    Q1 2014 has seen the first reduction in the corporate cash mountains that have grown since the 2008 crisis. The reduction is due to large dividend payments, share buy-back programmes and indeed a significant amount of CAPEX (Including M & A) as the need for innovation and growth is now required to meet stakeholder expectations.

    Credit has played its part in this scenario as the credit agencies are duly increasing their credit ratings and credit limits for many of the corporates who are embarking upon the above journey, especially if they have paid back expensive debt too.

    However, how does one communicate this through the corporate organisation and to your customers, suppliers, investors, employees and other interested parties?

    Also how does the culture- the functions- in the organisation that were once ‘starved’ of cash and reducing costs now turn on the tap to create demand from customers, suppliers and investors?

    If the lines of communication are not balanced then one could soon see ‘overtrading’ occurring as profit outstrips available cash. In some organisations the demand chain will become out of sync with the supply and inventory chains which again could impact the investment chain when need for liquidity occurs.

    Cash forecasting becomes key, as this is normally the ‘communication’ tool however this tool is at the end of the ‘financial supply chain’ process.

    One needs to be agile and proactive by being immersed in the sales/procurement/operational and treasury teams to ensure that ‘checklists and balances’ are in order and that the culture of cash interdependence is upheld throughout the organisation. Early warning metrics are needed.

    In real terms this means communication lines between sales/procurement/operations and treasury being made strong but flexible. This is accomplished by salient KPI’s and metrics that support the cash conversion cycle of DSO, DPO, DIO and ‘allows’ for the capex(M &A)  scenario(s) mentioned at the outset of this post.

    Posted on: May 19, 2014 by: mardle0312

    Working Capital Optimisation Minimizes Operational Risk Through Strategic Governance

    When tackling cash management issues the challenges can be broadly identified into two categories of Governance.

    The first category is rule based Governance. The rules for working capital could be for:

    Suppliers-Pay according to the agreed payment terms

    Debtors- Chase according to their overdue amounts

    Stock- Replenish according to the SKU parameters

    Work in Progress- Incur costs as allowed by systems and invoice according to accounting guidelines i.e. as laid down by SSAP9 Percentage of completion accounting

    The second category is through subjective Governance. The process of establishing working capital could be for:

    Suppliers-Pay according to a dynamic discounting,  supply chain finance programme.

    Debtors – Pre-emptive progressing followed by default analysis

    Stock-value is determined after establishing disposal costs

    Work in Progress- value is driven by establishing actual cash flows

    Both categories of Governance (Rule based and Subjective) require strategies that require C Level buy in however the more adaptable, agile and flexible organisations normally require a subjective approach which in turn requires delegation of the overall strategy to operations and purchasing functions.

    Whereas the rule based Governance of working capital can be delivered by ERP systems the subjective Governance requires management of each ‘link’ in the process of the financial supply chain.

    Let’s take the example of a strategy that calls for suppliers to be paid later therefore increasing Days Purchases Outstanding (DPO) and therefore ensuring cash is held for longer in the customers bank accounts.

    The usual traditional approach would be to instruct the payables function to delay payment runs or reduce amounts to suppliers.

    The new subjective approach is to appreciate and understand the creditors ledger by way of categorising suppliers by ‘value of risk’ associated with not paying them their due amount on the agreed date.

    Posted on: March 6, 2014 by: mardle0312

    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?


    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.

    Posted on: February 21, 2014 by: mardle0312

    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.


    The Strategic Report required under the 2006 Companies Act as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts’

    Narrative within the Management accounts could contain views from ‘senior managers’ – defined in the aforesaid Act as being a person who-

    a)     Has responsibility for planning, directing or controlling the activities of the company, or a strategically significant part of the company, and

    b)     Is an employee of the company.

    By reviewing management comments, directors should be able to identify KPI’s/KRI’s that they then can provide as evidence to support the Strategic Report , but, with their own narrative, so that per section 14 of the Act ‘disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company.’

    The critical piece in our view is the ability to measure the performance of the organisation, based on Paragraph 5 of the Act, ‘effectively’ which means reviewing trends and strategies to improve performance and delivering action plans that address the cash impact on the organisation.


    Monthly or at least quarterly management accounts are more current that interim management statements (IMS) and statutory accounts which should provide management accountants with an ‘edge’ over their peers.

    Frequency of reporting has increased exposure and therefore pressure on CFO’s and the whole executive team to the point that narrative is somewhat lacking in depth and breadth as it seems many IMS are attempting to ‘hide any surprises.’

    We see on a regular basis reports via social media, analyst opinions, newspapers, disclosures under the Freedom of Information Act and various other media ‘interventions’, that organisations have been ‘found wanting’ when it comes identifying trends in their levels of performance.

    This can immediately be reflected in share prices falling or rising, enquiries being announced, Parliamentary panels being established, various commissions established or indeed the decision for certain key personnel like CEO/CFO to be suspended or ‘let go.’

    The purpose of management accounts, in part, is to reflect KPI’s/KRI’s and various other metrics that support action plans in accordance with how strategy is being implemented.

    The greatest threat to the strategy is normally reflected in cash terms in that once a ‘surprise’- good or bad- is highlighted one should already have reviewed an action plan that puts some cash measures on the impact which could include appreciating what the future impact might be on ‘external’ measures like the market effect on share price or maybe on how the public might reflect on a particular service, a particular political approach etc.

    The Strategic Report required under the 2006 CompaniesAct as amended in October 2013 specifically states in Paragraph 12 that in the case of a quoted company ‘where appropriate, include references to, and additional explanations of, amounts included in the company’s accounts.

    This blog will be developed further to appreciate the affect this will have on Management Accounts.

    Customers and suppliers alike whether they be credit controllers, purchase/ sales managers or financial directors will request a review of management accounts on a regular basis. Why?

    A retained or prospective customer/supplier will want to ensure that their suppliers/customers are a ‘going concern’ at any point in time whether it be placing a new or revised contract, understanding an existing situation regarding a contract or in fact if there is a dispute in the offing whether it be with an invoice, goods/services received or in fact a matter to do with future business.

    The management accounts should not only provide a detailed analysis of how cash is being managed whether it be through DSO, DPO, DIO which are lagging indicators but also the key performance indicators (KPI) and key risk indicators(KRI) that are being measured and monitored by the organisation to manage the DSO, DPO and DIO results.

    Furthermore the management accounts should reflect narrative concerning any changes in financing and strategies being reviewed with regard to contractual terms with both customers and suppliers. Any capex, research and development or significant ‘extraordinary’ outflows of cash re statutory fines, contractual penalties etc. should be risk assessed regarding probability and the cash consequences estimated.

    Why are the management accounts reviewed regularly by lending institutions, credit instititions and investors?

    • Management accounts, although unaudited, can deliver detail behind the numbers that allows credit and lending institutions to understand areas like DSO, DPO, DIO which traditionally, as lagging indicators, do not reflect the current trends in cash management.
    • Such detail can include revenues by business segment, costs associated with problematic contracts and even future references to the way cash might be invested regarding M & A activities.
    • Lending institutions are likely to contact senior management to establish certain aspects that they require clarification on and management accounts can support the decision making criteria that affects the way cash flow could be affected either negatively or positively.
    • Timing is critical in scheduling the publication of information that is required for statutory purposes and management accounts can ‘create’ a level of expectation that means a ‘no surprise’ culture can be established in time for public/statutory disclosures.