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COLOBUS LTD
Experts in corporate turnaround, recovery and finance
A Director’s Lot Can be a Happy One!
Before the money runs out…
As a director of a company, you’ve got a lot on your plate. You are responsible for the strategy and direction of your
business but you also need to win new clients and keep them happy whilst maintaining the quality of your product or
service. Moreover, you bear responsibility for complying with regulations. You employ a team of people, some of whom are
very expensive, to help you and in return for their wages or fees you expect them to do a good job.
But things don’t always work out the way you expect.
Cash runs out for one of three fundamental reasons:
Sometimes businesses run out of money (a situation
happening more and more as the recession bites). This may
follow the withdrawal of bank facilities; the failure to collect a
significant debt; or the inability to source sufficient capital to
go forward (a particular problem if your business is growing).
Or it could be that you're a victim of fraud. Whatever the
cause, the problem never appears entirely unannounced.
· trading conditions
· funding shortfall
· fraud.
Fraud is a special case; its causes and consequences
would need a library of books and therefore not
specifically addressed here.
A business will fail if it runs out of cash - and, importantly,
cash is not the same as profit.
Some of us are old enough to remember Laker Airways. This was a
company which was consistently profitable for its three-year life but
which spectacularly failed when it was unable to re-finance its credit
facilities.
As a new airline it had long life assets (airliners) funded largely by threeyear debt and, as a profitable company, it expected to roll over those
debts. However, it left the roll-over negotiations quite late. Prior to
concluding a deal with the banks, Laker’s larger competitors drew it into
a price war.
The banks got worried, the loans weren't rolled-over and Laker collapsed.
In more recent times, boards of directors of companies as large and powerful as Northern Rock in the UK and Lehman
Brothers in the US have made false assumptions and overlooked significant risks that have led to their companies' collapse.
You, however, are unlikely to get government support, so if you overlook a material factor of your business, there won’t be
a tax-payer safety net for you.
Your job as a director is to be aware of the assumptions your board is making and to identify all the material risks affecting
your business. The problem is that people who run businesses are, on the whole, a self-confident, optimistic bunch.
They are also busy. In my experience, this is equally true whether you run a large international businesses or a small family
concern. Self-confidence, optimism and lack of time can lead to warning signals being overlooked. Perhaps the biggest
challenge for a director is to be able to determine strategy, establish culture and guide subordinates (which is broadly what
‘directing’ means) while simultaneously having the skill and making time to attend to detail (loosely, ‘management’).
We know, however, that whatever gets monitored gets managed. If it isn't watched or is watched only superficially, it won't
be managed and sooner or later something will go wrong. You need facts, unshakeable facts, and these are best committed
to paper or electronic reports.
Many times I've encountered companies where the cash has, or is about to, run out and the board does not even know the
basics of turnover, much less margin or break-even sales level.
We all hold a view of the way things are going but that view is almost always too optimistic, in part because people will talk
louder and more often about sales successes and less often, if at all, about the associated costs or budget over-runs.
Continued
1st Floor, 12 Frailey Hill, Woking, GU22 8EA
T. 01483 720517 F. 01483 773649 E. [email protected] www.colobus.co.uk
Registered Office: 10 – 14 Accommodation Road, London NW11 8ED Company Number 3789764 VAT Registration 742 7277 20
Short Form Working Capital Report
Things to monitor
Turnover
By this we mean invoiced sales.
Monitoring this will encourage your
staff to issue invoices promptly. If you
don’t, turnover will be merely talked
about and suddenly this month’s sales
are lumped together with last month’s
and next month’s too – and you’ll risk
getting an over-optimistic view.
Know your break-even point. If you
have your own finance department,
get them to document this for you. If
not, or at an early stage in your
growth, do it yourself but have it
written down and regularly reviewed
(at least twice yearly). It is of use only
if it is documented and based on real
costs. Check break-even levels against
actual monthly results.
Debtors
Look at your debt ageing regularly.
This will tell you if you’re being paid. If
most people are paying late beyond
agreed terms, either you’re not
putting the right effort into collection
or there is a problem with your
product or service.
If you are a retailer, you are unlikely
to have significant debtors but you
must look closely at stock. Monitor
stock turnover and carry fast-moving
items. Use promotions to push slowmoving items out the door.
Stock
Trade debtors
Last week
X
X
Movement
This week
X
X
Cash
X
X
Trade creditors
(X)
(X)
SF working capital
—---------X
—----------X
It is no use having the reports a month after the event. 10 or 11 days after
month-end is a reasonable delay, even for small companies.
Ideally, the monthly management report will include a cash flow report (see my
preferred format below) and a controller’s report, which should highlight key
variances, forthcoming commitments and potential problems. For very small
companies this may be unnecessary but, as soon as you are large enough to have
a full-time person in accounts, preparing a controller’s report should be a
requirement of their job.
If you have a finance department, you need to know that it regularly reconciles
the bank accounts, at least monthly. In a small company, you may need to do this
yourself or certainly check that it is done.
Monthly Cash Flow Report
Operating profit
Woking capital movement
Working
Add: Increase in debtors
Add: Increase in stock
Creditors
As with debtors, monitor the ageing. If
you look solely at your cash balance,
your staff may be encouraged to
manage that by extending creditors’
ageing. You may only discover this
when an key order from a supplier is
on ‘stop’. - or worse, when you receive
a statutory demand!
One of the most effective ways of
controlling your business is to monitor
key data in a simple format. Among
the best methods is the Short Form
Working Capital (SFWC) and we
recommend that our clients monitor
this weekly. SFWC is the net balance
of cash, trade debtors, stock and trade
creditors.
You must see and read monthly
management accounts which include,
at minimum, an Income Statement
(profit and loss account) and Balance
Sheet. Accounts software will produce
these at the push of a button.
Question whether these accounts
reflect your break-even and trading
expectations.
Add: increase in other debtors
Current Month
Year to Date
x
x
x
x
x
x
x
x
Less: increase in creditors
(x)
(x)
Less: increase in other creditors
(x)
(x)
x
x
(x)
(x)
x
x
x
x
Net movement in working capital
Fixed assets
Fixed asset purchases
Depreciation charged
Net investment / (release) in fixed assets
Financing
Add: Interest & financial income
x
x
(x)
(x)
(x)
(x)
Net financincial costs
(x)
(x)
Net operat ing cash flow
X
X
Funded by:
Profit / (loss)
x
x
Debt drawn
Debt repaid
x
(x)
x
(x)
Equity issued
x
X
x
X
Less: Interest paid and financial costs
Less: tax paid
Continued
1st Floor, 12 Frailey Hill, Woking, GU22 8EA
T. 01483 720517 F. 01483 773649 E. [email protected] www.colobus.co.uk
Registered Office: 10 – 14 Accommodation Road, London NW11 8ED Company Number 3789764 VAT Registration 742 7277 20
Do’s and Don’ts… especially if money is, or may become, tight.
Banks
Do not let fear or anger lead you to ignore your bank.
If you are using the bank’s money and you encounter cash-flow problems, you must communicate with
them.
Do not wait until the last minute.
If
If
If
If
cash is tight and you receive a county court claim, you must deal with it immediately.
you have cause for defending the claim, you must issue a prompt defence.
you receive a statutory demand, you must deal with it quickly, you only have 21 days.
there is any doubt over the claim, you must use a solicitor and ask for the demand to be set aside.
VAT
If you are struggling to pay VAT, you must contact the business support services helpline and ask for time
to pay. Ask for longer than you think you need and do so in writing. You will need to supply a cash-flow
forecast.
If you cannot meet your current quarter’s VAT liability, do not propose to meet that over the next quarter
because that will leave you short when the next payment is due. Propose, instead, to meet the due amount
over at least one year. There is no penalty for being late twice with VAT but after that there is a steep and
punitive penalty ladder which you must avoid.
PAYE is only subject to late payment interest charges after 19 May.
On the positive side...
Handled well, HM Revenue and Customs officials will generally be co-operative and helpful and they can be a
source of low-cost and sometimes free finance.
But...
Handled badly, HM Revenue and Customs can become an enormous burden with great power and the right to
charge punitive costs.
And, finally...
Of course, once you have a payment plan in place, you need to stick to it.
1st Floor, 12 Frailey Hill, Woking, GU22 8EA
T. 01483 720517 F. 01483 773649 E. [email protected] www.colobus.co.uk
Registered Office: 10 – 14 Accommodation Road, London NW11 8ED Company Number 3789764 VAT Registration 742 7277 20