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Sound financial advice is key to surviving slump

Sound financial advice is key to surviving slump
It is one of the oldest truisms in business life - cash is king.

It is one of the oldest truisms in business life – cash is king.

Never has that been more so than now, even in what is in some circles viewed as being one of the wealthiest industries and areas in Scotland – the oil and gas industry in the north-east.

The industry, from top to bottom, is under some pressure at present.Margins are tight and getting tighter.

The Oilexco North Sea failure illustrates the vulnerability of relatively small operators – which in any other industry would be regarded as very large businesses – to the credit crunch and long-term supply contracts entered into when commodity and equipment-hire prices are high.

In the service chain, very many job losses have been announced in recent months. Even industry beacons have recently talked of a challenging outlook for 2009.

Privately, many businesses currently talk of concern over order books for the latter part of 2009 and early 2010.

But clearly, even now, opportunities exist.

Most would view the medium-term outlook for the industry as being very positive.

However, to take advantage of that, a business needs to be strong through the current turbulence.

Every management team in a business which is not sitting on a large cash pile should:

Take advice – this must be specialist and experienced.

Know what is happening in your business – good information is absolutely key to keep yourself, rather than the bank or the creditors, in control.

Manage working capital proactively and aggressively.

Sell cash-consuming, non-core businesses and assets.

Assertively challenge all costs before they are incurred, not after the event when you are having to sign the cheque.

A business cannot be turned around simply by stretching creditor payments. Doing so can provide a one-off breathing space when things are very tight, but it will cause short and long-term reputational damage to the business, making credit even harder to obtain in the future. Strong cash management is critical for any properly run business, of any size.

For example:

Contract terms – you have finally won that order from the big customer, and at a good margin. But when will you be paid? Flexibility given to a customer on design, delivery or even price should be an opportunity to seek improved payment terms.

Staff incentive schemes – too many schemes focus solely on profit, or even worse sales, with no attention paid to cash flows. A sale is only a sale when the cash is in the bank.

Team work – involve everyone who has a part to play. A good credit-control function working in conjunction with, not in conflict with, the sales function will be a powerful force. Credit control is about preventing losses, not preventing sales.

Financial information – would you drive a car without a speedometer? Or step off into the road without looking to see what was coming at you? Then don’t run a business without strong, relevant financial information.

Cash flow forecasts are of very limited use unless they are part of an integrated, holistic business-wide model. Projection packs should, for example, include a 13-week rolling cash flow forecast, key performance indictors and schedules of facility capacity and banking covenants.

Management information – and advisers’ reports – should be presented in a way that is understood by all senior managers, not just the accountant.

Strong and experienced financial advisers are also vital.

Whether it is ongoing – e.g your auditor – or bespoke – e.g. an independent financial health-check review, or developing your cash management systems for the modern business environment – it is critical your advisers deliver value to you, and work with you in the common goal of your success.

Treat the financial health of your business as you would your own health.

Do not be afraid to have a check-up and to seek advice, from an appropriate specialist.

You wouldn’t go to the hairdresser to have pneumonia treated; in the current climate, it is vital to choose your financial adviser equally carefully.

Neil Armour is an associate partner with KPMG. He heads the firm’s restructuring practice in the north-east.

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