By Clive Lewis, Head of Enterprise at the ICAEW

The Finance Director has a vital role in collecting all the financial data and communicating it internally and externally, writes Clive Lewis, Head of Enterprise at the ICAEW. The key cashflow and balance sheet figures should be emphasized in management information and meetings.

In many companies, the Finance Director will be the main contact with finance providers and shareholders as well as a key contact for customers and suppliers. They must set the tone of communications with stakeholders and take the lead in discussions particularly if business conditions deteriorate.

Monitor key customers and suppliers
One area where being well informed is absolutely vital is in respect of the financial health of key customers and suppliers. Customers (and suppliers) may have initially been a good trading partner, but things can change rapidly in business. Therefore by monitoring your risk you can be alert to the early signs of a business experiencing problems. Companies, whether they are dealing with customers or suppliers, will be looking at those whom show better long term stability and risk.

Given that the number of companies becoming insolvent is forecast to rise, rigorous use of Credit Insurance offers peace of mind that your business is not going to be hit by a customer default. For companies whom may have experienced a significant loss in the past and with the likelihood of borrowing becoming harder to come by then protecting your revenue is another important measure to consider.

With new potential customers and suppliers it is always worthwhile taking adequate steps to ensure you 'know who you are dealing with!' By taking a credit report and obtaining a credit view on the risk of doing business with someone will be one of the first steps towards protecting your business from risk of bad debt or supplier failure. Credit reference agencies offer a variety of credit information. Some agencies now offer a rating score which is a probability of failure indicator and will indicate on a scale on the likelihood of a company failing in the next 12 months.

Tighten credit management
Many companies will already have tightened up on credit management. But close co-operation between credit management and operational staff can also help spot potential difficulties with customers as well as assist with chasing outstanding debts. Consideration should be given to reducing the credit period available to customers, particularly those delinquent in the past. In extreme situations closing credit accounts may be the only way to eliminate undue risks.

One word of caution, if a debtor does look to be in trouble, do not leave it too late to obtain assistance from a third party to help recover monies as experience shows that the longer it is left to take action the weaker the debtor becomes and the chances of successful recovery become slimmer.

If you’ve got a good story, communicate it
Companies with a strong balance sheet who have taken advantage of the ability to file abbreviated accounts at the Registrar of Companies may be doing themselves a dis-service. For these companies, becoming more transparent with their financial reporting and filing full accounts is a good start and could assist the company in gaining favourable rates when borrowing. Allied to this is the importance of demonstrating adequate auditing controls which lends itself to responsibility of the management board and could be seen as a lessening credit risk than a company that claims full audit exemption.

Consider factoring or invoice discounting
As mentioned earlier companies may be examining their operating costs in order to directly improve profitability. Consideration of factoring or invoice discounting debts can reduce operating costs as well as providing an alternate source of financing. Many members of the Asset Based Finance Association offer full ledger management from invoice creation through to close out collections and legal proceedings.

The immediate benefits can include improving cash flow and reducing overheads. Factoring and invoice discounting were once thought of as expensive but they usually offer to finance a greater percentage of debtors than a bank loan. The major disadvantage now is often considered to be the constraint of pre-approval of customers and the level of trade they might sanction. On the other hand the restrictions they put in place are based on a wide range of evidence so it might be considered imprudent to exceed their credit limits.

There will be opportunities
For companies who have survived an economic downturn and husband their resources there will be opportunities. Commercial property prices have already fallen and for businesses with finance to spare, represent a good buying opportunity. If the forecasts are proved right there will be businesses for sale at knockdown prices.

The warning signs of long term deterioration are:
•weak balance sheets,
•trading under-performance,
•deteriorating margins,
•high gearing,
•inappropriate gearing (such as debt servicing not matched to cashflows),
•volatile working capital and lumpy sales revenue,
•too much management attention is focussed on the profit and loss account and too little on the cashflow and balance sheet,
•a complex group structure with little or no consolidated information clouding the group’s performance.

Short term health warnings are:
•little or no headroom in working capital facilities,
•extending trade creditor days,
•more frequent delays in sending already drawn cheques,
•current account balances staying persistently overdrawn,
•suppliers on stop and stretched payments to HMRC, VAT, etc.

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