As companies begin to feel the impact of the financial and economic climate, Ben Collett, director within KPMG Restructuring in Birmingham, looks at some of the disciplines required to ride-out the effects of a downturn.
Working within the restructuring environment it has been clear to see that despite the wide press coverage of the credit crunch, most local businesses had felt removed from the potential impact on their own business.
Even with availability and cost of corporate borrowing tightening, local businesses on the whole, had felt reasonably unaffected for some time after the initial collapse of the US sub-prime mortgage market.
However, as other factors now come into play – rising input prices and plummeting consumer confidence – the wider effects of a difficult trading environment are beginning to impact.
Indeed, according to recent KPMG research, far more UK companies are now indicating that they are experiencing delayed payments from customers, reduced access to credit, increased financing costs and suppliers demanding earlier payment, compared to their US counterparts.
With there having been no significant downturn in our economy since the 1990s, there has arguably been a loss of corporate memory in dealing with such a combination of factors.
The starting point is always cash. It is fundamental that managers take a proactive approach in order to maximise control of cash flow before the business gets into difficultly. Companies without best practice systems of cash management will find themselves increasingly squeezed between increasing customer terms and reducing supplier terms.
Cash management processes focused on gaining improved visibility and control of cash and working capital across the whole supply chain will create opportunities that reduce operating cycles and generate cash.
To drive sustainable improvement, leading companies embed cash management into the strategic decision-making process.
One way to do this is for companies to incentivise executives with cash as well as profit targets. Those that do have fared better over the past three years and operate with a greater level of control over cash flows.
With demand faltering management focus inevitably falls on the cost base. But how deep should cuts go if future demand is uncertain? The wait and see approach is often used as an excuse to delay action. This can be a dangerous approach as most business failures are caused by a failure of management to react quickly enough to changing conditions.
A scenario planning approach in this situation is key – by developing a range of scenarios, different levels of cost reduction strategies can be prepared. If these are associated with forward looking KPI’s then implementation can be achieved without delay reducing the impact on profitability.
In some situations there may not be sufficient funding to implement required cost reductions. Again early decision making is key. By recognising the situation and stabilising cash flow it is often possible to pursue a sale of the business before funding runs out. Handled in the right way such an accelerated sale process can avoid the risk of insolvency, preserve the business and employment and potentially achieve a return for shareholders.
In any downturn, the difference between the winners and the losers tends to be their ability to look ahead, predict the impact and implement the strategies required at the earliest opportunity. Combining this with the tight management of cash is key to riding out the downturn.
Managers maintaining such a ‘lean’ approach will find their business more flexible and better resourced to take best advantage of market upturn when it arrives.