By Jeremy Priestley, Managing Partner at The P&A Partnership
July 2008
Whilst there seems to some intense political debate as to whether we are actually in a recession or not, there is little doubt that parts of the economy are suffering a considerable downturn in profit expectations. As well as dealing with larger numbers of companies with serious difficulties than this time last year, we are seeing the directors of a significant number of profitable companies where the outlook down the line is problematical.
A common thread amongst this latter group is:
• They are currently profitable
• They are working on tight margins
• Sales turnover is currently dropping by as much as 50%
• Factory gate, energy and transport costs are rising significantly, and in a few cases by up to 25%
• Most have fixed cost liabilities – either mortgage or hire purchase commitments which will be difficult to meet later in the year and into 2009.
• Debtor days outstanding are stretching out and there is creditor pressure to reduce terms of credit
• Where the sales ledger is insured they are experiencing exclusions by the insurer.
Directors in the better managed and well advised companies seem to have much of these matters in hand, but there have been two areas where we have been able to give particular advice:
• Rescheduling the mortgage and hp commitments – there seems to be an appetite amongst certain banks and asset based lenders to give forward commitments that will address the cash outflow created by the fixed payments – especially for the well managed and advised companies
• Improving the cash flow by a review of credit and collection procedures with a 1 or 2 day consultancy from our associated company P&A Receivables Services plc. As well as developing a plan to reduce debtor days, significant attention is given to the management of credit limits applied to the sales ledger, the training and recruitment of staff; in some cases we have taken over the ledger and are collecting it in their name on an undisclosed basis, with some cost benefits.
By way of more general advice, and to the much wider business market, we have been encouraging directors and proprietors to:
• Firstly, to dust down their business plan and start producing weekly/monthly cash flows and profit monitors. If they don’t have this information to arrange for their accountant to set it up; but importantly to ensure they understand the implications of the figures produced, and to treat the cost of having this information as a tax deductable insurance to stay in business.
• To review their debtor book and establish the extent to which they are giving credit to their customers – if on average it’s well over 60 days, to do something about it. To review all customer credit limits, with an offer of help from Scott Cooper at P&A Receivables who can be contacted on 0114 268 8868.
• To look critically at all expenditure, and cut out any that’s questionable straight away – advertising comes quickly to mind.
• If they were thinking of expanding, taking on new staff, or buying new machinery to think again and talk it through with their accountant.
• To ensure that main suppliers are paid promptly – and expect them to want to be paid earlier.
• Put a freeze on personal drawings, this may be the year not to take a holiday or buy a new car.
• To keep their bank manager fully in the picture and not to exceed the overdraft limit without asking
For those companies that are in a distressed situation and for whom we have acted, we have been concerned at the circumstances in which some assets have been transferred, as well as the number of directors that have allowed the company to trade unlawfully, and so taking on personal liability for some of the debt. The responsibilities of directors are well documented, as is the definition of the state of insolvency – if you would like clarification on any such matters please speak to me or any of my partners.
There is no doubt in my mind that the current problems, seriously affecting many businesses, will not go away in the short term – the loss of a business and the effect on the livelihood of its owners and employees is always regrettable, as is the losses to the creditors. The effects will also be felt by professional advisors with a reduced fee income. I have always believed in the maxim that it is far more profitable to keep a client than to lose it, especially if have to find 10 new clients, in a very difficult environment, to recoup the income lost!
If you are currently reviewing your client base and discover problem situations please speak to me or one of my partners – we do not charge for an initial consultation.
If you have clients that you think would benefit from a review of their sales ledger operations please speak to Scott Cooper at P&A Receivables Services plc on 0114 268 8868.
< back to News
headlines
