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Begbies Traynor Group plc
Networking for Printers Forum Tuesday 20th
January 2009 Improving your Cashflow
Management Graham Ingham Regional Director BTG
Commercial Finance
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Begbies Traynor Group Specialist Professional
Services

• Established in Manchester in 1989
• AIM listed since 2004 (market cap of 130
  million)
• Strategic acquisition and organic growth
• UKs largest corporate recovery, insolvency and
  corporate finance business
• Structure and ability to deal with complete range
  of client size
• Head office 340 Deansgate, Manchester

700 Partners Staff in 40 Locations
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The current economic climate
Key Economic Cycle Business Turnaround Business
Cycle
We are here
Output/ Profitability GDP
2003 2004 2005 2006 2007 2008 2009 2010
2011 2012
Time
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Setting the scene - Common issues being faced
today

• The last recession was 1992 and we have had
  unprecedented growth for 16 years.
• This has been underpinned by cheap lending and
  the banks making riskier lends which have pushed
  up asset values. (50 of loans have come from
  foreign banks or non bank institutions, who are
  retrenching or like Icelandic banks have gone
  bust)
• Capitalism is a machine - cheap money in - more
  lending out.
• The machine is now going hungry and availability
  of funding is restricted.
• Demand and supply The banks want less risk and
  higher reward

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Setting the scene - Common issues being faced
today

• Strong businesses are being jeopardised by weaker
  customers and general liquidity concerns.
• Credit insurers are pulling limits and increasing
  premiums.
• The bank has concern over security and
  provisions. They are maintaining lending with the
  Government desperately trying to underwrite
  toxic debt.
• Businesses are seeking to generate, maintain or
  raise sufficient cash to support ongoing trading
  levels
• Margins are coming under pressure as most
  printers have struggled to pass on rising costs. 
  In fact, a high number (43) have had to cut
  prices to compete for business. At the same time
  that prices are coming under downward pressure,
  input costs are rising for many.  The principal
  increases during the September to November period
  were in energy where 57 reported an increase,
  and also in paper and board costs, where no less
  than 61 recorded increases.  (Source Printing
  Outlook)

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Redflag A!ert - Sector Review Q3 2007 vs Q3 2008
Breakdown of Sectors with Critical Problems Q3
2007 vs Q3 2008
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Improving cashflow management

• Key questions
• Do you have sufficient cash reserves to meet
  commitments and pay suppliers on time?
• Do you have finance facilities which will grow as
  your business grows?
• Can you dictate terms of supply?
• Do you monitor the credit worthiness of your
  customers?

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Improving cashflow management

• In its simplest form cashflow is the life-blood
  of all businesses and is the primary indicator of
  a Company's health.
• Why does it matter?
• Most businesses extend credit to their customers
  and this requires finance.
• Companies fail when they run out of cash, not
  when they make losses, even profitable businesses
  go bust.
• Something that has been forgotten in the last few
  years and in part a reason for the credit crunch
  is lenders are repaid out of cashflow (and
  recover their debt from security).
• Lenders can no longer rely on a rising property
  value to justify their lending.

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What is in your control?

• There are a number of strategies you can pursue
  which all directly and indirectly affect cashflow
  
• increase turnover
• improve margins
• reduce costs
• acquire businesses
• sell your business.
• I will concentrate on 2 key areas for improving
  cashflow
• Credit Management
• Restructure financial facilities

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1. Credit management cash conversion cycle

• How long does it take you to convert your raw
  materials into sales and then into receipt of
  cash.
• Work out your working capital requirement?
• Stock trade debtors trade creditors
  cash conversion cycle
• divided by sales
• Example 1million pound turnover business
• Stock 150,000 Trade Debtors 200,000
  Trade creditors 250,000 100,000/1,000,000
• 10 pence in every 1 is taken up in working
  capital.
• this finance cost is variable depending your
  terms and conditions and how you manage them.

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1. Credit management (continued)

• Or shown another way
• Debtor collection periods 73 days
• Stock turn rates 55 days
• Creditor payment terms 91 days
• Therefore 37 days needs to be funded by you
• 37/365 1,000,000 101,369 working capital
  requirement or
• Therefore every day you fund increases/decreases
  your working capital requirement by 2,739
• Apply the formula to your business and see how
  your working capital requirement
  increases/decreases and the real cost of letting
  debtors pay slowly holding stock or paying
  quickly..

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1. Credit management - Where can you improve?

• Remember cash does not automatically flow into
  your bank account as a result of providing
  goods/services. It needs to be tracked, hunted
  down and captured.
• Accelerating your cash inflow involves
  streamlining all the elements of cash conversion
• Customers decision to buy and ordering how easy
  and quick is it for an order to be placed.
• Credit decisions use a credit reference agency,
  what is your credit policy, remember a sale is a
  potential bad debt until it is paid. Dont be
  tempted to supply if references are poor.
• If your margins are 10 and you incur a 10,000
  bad debt you need to find another 100,000 of
  sales to replace this lost income.

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1. Credit management - Where can you improve?

• 4. Fulfilment, shipping and handling ensure
  orders are complete and proof of delivery is
  received otherwise you will incur disputes and
  delays.
• 5. Invoicing the customer - what about special
  payment terms, early payment discounts and
  penalties for late payment, factoring?
• 6. The collection period get organised,
  ruthless management and tracking of your sales
  ledger cannot be stressed enough. Ensure you have
  set procedures or Dunning cycle for your
  collections.
• Payment and deposit of funds your customer is
  trying to delay paying you as much as possible to
  improve his cashflow. Therefore you need to offer
  beneficial and easy ways to accept payment
• Deter detrimental forms of payment such as
  payment by post or cheques. For example make BACs
  payments the norm. How quick does your bank
  credit your account?
• 8. Remember you may feel that you need more
  working capital facilities, but by managing to
  reduce the cash conversion cycle by 1 day will
  free up 2,739 a day plus any savings in bank
  interest on this amount..

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1. Credit management - Where can you improve?

• Tip 1 Know your customer
• Check the exact name and legal status of each of
  your customers (you will need this if you ever
  have to take legal action to recover a debt).
• Tip 2 Agree payment terms before you
  supplyMake sure that your customer's order does
  not suggest different payment terms.
• Tip 3 Invoice accurately, clearly and
  promptlyAn invoice will not be paid if it has
  been sent to the wrong address or has the wrong
  company name on it.
• Tip 4 Do not be afraid to ask for paymentMake
  immediate contact with the customer when payment
  has not arrived. Be assertive about what you
  expect and when you expect it. Make the
  consequences of non-payment clear.

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2. Restructure financial facilities

• Overview
• You should regularly produce cashflows to
  identify cash surpluses and cash shortages.
• If you have surpluses, what do you do with the
  money?
• Repay loans, reduce overdrafts, earn interest,
  pay creditors quicker for a discount.
• If you have shortages the bank will not
  appreciate a late warning that you need extra
  cash.

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2. Restructure financial facilities - What we do

• We are part of the BPIF Financial Alliance
• Financial Health check - Review the business,
  include appraisal of existing finance
  arrangements, considering all business
  objectives
• VAT/PAYE Arrears payment plans
• Review all business assets and suitability of
  existing/proposed funding
• Prepare funding document, if suitable, to assist
  lenders in arriving at appropriate decisions
• Manage the relationship between clients and
  potential lenders
• Collate, compare and contrast formal offer
  letters
• Guide client to acceptance/drawdown of facility.
• Advise Directors of their fiduciary duties

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Overview of our services
BTG Restructuring
Commercial Finance
Forensic
Corporate Recovery
Corporate Finance
Tax
Assisting companies
Restructuring Cash management Investor
assistance Lender assistance Insolvency services
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2. Restructure financial facilities -What is
happening out there?

• The banking community are very reluctant to lend.
  Why?
• Less experienced and skilled bank managers. Many
  have only experienced lending in the last 15
  years.
• The last recession ended in 1992 so bank mangers
  younger than 40 have never experienced a
  downturn. The old and grey bank managers are a
  rare species. If you have one keep hold of them.
• Profit driven, cheap money, high risk, too many
  accounts to manage, not enough time time to
  present your case correctly.
• We are regularly asked to be the buffer between
  the bank and the client. There is a cost, but the
  cost of not presenting properly to the bank is
  that credit is often refused.
• 180 degrees - the banks have gone back to
  basics, so dont expect miracles if you are over
  extended.

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Case Study 1

• Haulage Business - turnover 10m
• We visited in July after concerns from the bank.
• We found alternative financiers but this wasnt
  the long term answer, so our Corporate Finance
  team met the directors in August.
• Unbeknown to us they were pursuing a refinance
  themselves with another bank. In November this
  bank declined facilities.
• They finally engaged us in November 2008, but
  they were not forthcoming with information
  requested to advance the process. It needed more
  equity.
• In December they approached their bank for an
  additional 100k to fund wages over the Christmas
  period. This was declined.
• Administrators are now being appointed by the
  bank.

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Case Study 2

• Vehicle Hire Business turnover 1.5m
• They needed an additional 90k from their Bank
• Their bank manager was new to them and either did
  not have the time or knowledge of the business to
  promote to credit the case for additional funds.
• His accountant produced necessary information,
  but still the bank said no.
• We were then engaged to produce an independent
  review and case for the continued support.
• This has been finalised and the bank are
  supporting the business with further funds.

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Summary

• In our experience there is still some lower level
  bank lending to SMEs with strong asset bases,
  although criteria and terms are certainly
  tougher.
• There are opportunities for businesses to grow
  and we are still finding the banks are willing to
  back strong management teams with robust balance
  sheets.
• There is also the first sign of a positive trend
  with investments by business angels and trade
  buyers becoming more active in taking the
  opportunity to acquire companies or assets at
  depressed prices
• This may mean that there is a belief that asset
  values are reaching a floor and that they are now
  worth buying in anticipation of the eventual
  recovery.
• It really is a time of survival of the fittest.

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Summary (continued)

• The effect of cash is real, immediate and if
  mismanaged or not managed well it is very
  unforgiving.
• Good credit management and suitable finance
  facilities are essential, not a like to have,
  but a must have.
• Look at all stakeholders in the business from
  trade suppliers, to HMRC to shareholders and
  lenders.
• Know your customer and act quickly
• Final point is take advice early because the
  earlier you do the more options are available to
  you.
• In the 1930s a well worn phrase which is relevant
  today
• In God we trust, all others pay cash

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Contacts
Begbies Traynor Group plc 340 Deansgate Manchester
M3 4LY Graham Ingham Regional Director BTG
Restructuring T 0161 837 1944 M 07799 712
651 E graham.ingham_at_btg-restructuring.com We
are happy to provide an Independent business
review/healthcheck consultation free of charge
including a review of your finance facilities.
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