• 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.

    Posted on: August 23, 2013 by: mardle0312


    Where would one invest cash, resources and time into anything but the areas of an organisation that is core competence?

    To deliver core competence one needs all three but timing is the critical element. To determine the timing aspect one could attempt to align the organisation along project, product and service channels.

    This will establish the flows of cash required. A project should have milestone income streams, whereas a product could have invoicing at point of sale. Service should be on a contract basis where regular cash receipts are made say monthly and have specific clauses re termination.

    On the payments side detailed investigation is required to deliver these at a time when cash is available either from customers, investment community, shareholders or directors.

    Once this area has been understood then the timing of when a core competence initiative can be delivered could be communicated to the organisation as part of the strategy.

    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.

    A working capital strategy that changes functions into financial management chains.

    A demand driven supply chain seems like a perfect scenario that seems to imply that one can meet the demand from customers through an agile and robust supply chain. However, to achieve this utopia one may well require perfect data and perfect timing which we all know cannot be fully achieved hence the need in some cases re products for stock and for projects and services the requirement to record work in progress.

    We have therefore moved from a sales function demand chain and procurement function supply chain, to involve the financial function. Furthermore we have not fully addressed the financial transactions required to manage the many cash aspects regarding receipt of cash from customers or payment of cash to suppliers.

    It has long been recognised that the whole supply chain from backlog, thru procurement, purchasing and payment (P2P) has the greatest threat to an organisations cash flow in the longer term hence this requires CAPEX and working capital funding through a supply chain financing product that bridges the funding chasm.

    The backlog, newly placed orders to cash receipt chain (O2C) is about internal controls that can be adapted to deliver transaction efficiency that can require management  in the short term but only through trade finance programmes like invoice factoring that can prove costly.

    Posted on: August 16, 2013 by: mardle0312

    Narrative reporting is becoming a key component of an FD/CFO armoury as investors want to understand the return OF their cash in preference to returns ON their cash. As covenants, loans become due organisations should be in the vanguard by providing tables of values and dates regarding the reduction, termination, renewal or replacement of such debt.

    However timing is critical in providing such information. If one provides such information then it needs to be done fairly to all groups/classes of investors. Should the information reflect a challenging situation that has not already been explored and resolved with the funding providers then a strategy needs to address the approach that is to be adopted.

    While most purchase, merger or disposal agreement provisions will not be read after the closing of the whole transaction, there is one provision that is sure to be revisited: the working capital adjustment.
    The purpose of a working capital adjustment is to ensure that the target or purchasing company has an agreed upon level of working capital at closing and to discourage the sellers/buyers from manipulating working capital prior to closing. Here are a few tips that will help avoid ambiguity, and reduce the likelihood of a dispute, when it comes time to conduct the working capital adjustment in your next transaction.

    Accounting principles: The first step toward creating an unambiguous working capital adjustment mechanism is to clearly define what constitutes working capital. GAAP often presents options that can result in differences in how working capital is calculated.
    Pre-closing estimate: In a two-step transaction (i.e., when the signing and closing do not occur simultaneously), one needs to generate a schedule of working capital balances.

    Dispute resolution: The buyer and the sellers typically agree to refer any working capital adjustment disputes that they are not able to resolve to an arbitrator (usually an accounting firm) for final resolution. However we could act as a mediator and facilitate prompt solutions.

    Working capital escrow: In the sale of a typical private company, the sellers may remain key members of the target’s/acquirers management team after closing or they may sail into the sunset after a successful exit. Either case creates collection risk for the buyer if there is a downward working capital adjustment. Creating a separate working capital escrow at closing is a way to provide security for the buyer/seller (when disposing).

    A well-drafted working capital provision will help ensure that the post-closing working capital adjustment process does not evolve into anything more than the routine matter you intended at the outset of the transaction.


    Understanding the cash conversion cycle of a takeover target is critical to a successful dispoal or M &A type activity.

    Cash driven by poor collection systems, untimely sales invoicing, and inadequate reporting can seriously impact the value of all businesses involved.

    Suppliers need confidence boosting communication to ensure robust supply chains remain so.

    Employees require assurances of job retention.

    Share/stakeholders require constant meetings to deliver the message regarding M & A cash benefits of all types and over what timescales.

    In disposing of any part of any business the diligence needs to be on internal cash matters and on the recipient being able to pay in accordance with the contractual terms.

    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.

    Looking at your cash flow you note that there is a liquidity gap i.e. in two months you will need a further injection of short term cash. How could you address that issue?


    a)      Understand whether the liquidity gap is ‘a reality’ through investigating the reasons for the figures i.e. cash not received from debtors- are there quality issues or were invoices sent out late or incorrectly or with wrong values.

    b)      Once it has been established as being ‘a reality’ how can you mitigate it occurring? Maybe delay payments to certain suppliers, maybe ask for advances from customers, maybe sell stock or sell an asset?

    c)       Maybe review factoring, securitisation arrangements on receivables?

    Many organisations have suggested that they wish to follow corporate social responsibility guidelines and when looking at cash management how do you think this could be undertaken?


    a)      Debtors should be progressed ‘proactively’ from the time an invoice is being sent to the point that reconciliation occurs of cash being received against that invoice. Any issues are addressed as they arise i.e. timely. Solution driven response and communication occurs to management should this not be the case.

    b)      Suppliers are paid in accordance with agreed payment terms i.e. on time, full value

    c)       Employees and pension funds are paid in accordance with all agreements.

    d)      Purchase of capital items like factories in undeveloped locations deliver improved living standards for all employees and are fully sustainable in the medium term (5-10 years)