Gary Wasdell, group leader for the private client practice at PricewaterhouseCoopers LLP in the Midlands, explains why entrepreneurs hold the key to economic revival.
The power of money has arguably never been greater than in the current downturn or more critical to the future of the regional economy, and Midlands entrepreneurs hold the key.
As the region prepares to enter a recession, what should regional entrepreneurs be doing to maximise their wealth and how can they stay ready to take advantage of investment opportunities?
The global credit crisis has led to turmoil in the financial markets, which has meant reduced borrowing and this in turn is putting the squeeze on cash-strapped Midlands businesses. In the current economic climate, entrepreneurs are in a good position either to pick up equity investments more cheaply than might have been possible previously or to offer loan capital on favourable terms and in doing so, help other businesses to weather the storm.
But the cash-rich entrepreneurs need to focus on more than just investment opportunities. If they are going to succeed in navigating the downturn and act as the catalyst for a return to confidence in the region, they need to manage their current wealth with care.
It is commonly accepted that the businesses that emerged as sector leaders after the last recession were those that mastered the art of cash management – managing to keep their average net debt-to-equity ratio at around half that of their less successful competitors before the downturn hit. For this reason, the priority for many entrepreneurs in the region, whether hands-on managers or not, will be to ensure that the businesses they have invested in are well-run and have effective business strategies in place to help them ride out the recession.
The principles of good cash management are many and varied. They typically include taking proactive steps to review the financing arrangements of the business in the light of recent changes and adopting a hands-on approach to cash management by instigating measures like short-term cash flow reporting and forecasting. Tighter control of working capital may also be needed, to help maximise cash flow at a critical time. Throughout, there is a need for business managers to communicate openly and frequently with stakeholders about how the business is tackling the economic conditions.
In a downturn, entrepreneurs also need to be aware which investments deliver the most profits and which are the biggest liability. Key customers need nurturing and adopting such strategies can make the difference between business failure and survival. Entrepreneurs with corporate interests can take the lead in this area by encouraging business managers to consider which customers, products and channels are most profitable.
Of course, cash-rich entrepreneurs also need to keep a close eye on their business investments in the current economic climate. For example, are there projects that could be deferred until the economic conditions start to improve? Equally, entrepreneurs will also be aware that the downturn can also be a good time to invest – a time when it is possible to acquire business interests or other strategic investments at a knock-down price. Access to cash will ensure the entrepreneur is equipped to take full advantage of such opportunities as and when they arise.
When it comes to managing personal investments too, entrepreneurs need to take a similarly proactive approach to ensure they are maximising value and allowing sufficient flexibility to enable them to react to investment opportunities. In today’s market conditions, it is especially important to ensure that an individual’s investments are well-diversified - by sector, geographically and by financial institution – and this should be a priority consideration. In addition, it may be necessary to restructure investments by applying lean and efficient business and personal operating structures.
Of course, getting good tax advice is also important and in recent months, PricewaterhouseCoopers in the Midlands has noted an upturn in demand for specialist tax advice as individuals and entrepreneurs take account of recent changes to the capital gains tax regime and changes to inheritance tax rules concerning the use of trusts.
In the current economic conditions, it is vital that entrepreneurs get their priorities right and take proactive steps to manage their business interests and investments. While expert advice is of course valuable, entrepreneurs may need to step up their involvement and conduct reviews of their finances more frequently. At a time when cash is king, entrepreneurs have an important role to play in determining the region’s economic future.