We are coming out of the longest recession in recorded
history so this has to be good news doesn't it? The UK economy, we are told,
has the strongest forecast in Western Europe. So, if the signs of consumers
finally opening up their wallets are there then struggling companies across the
UK should be pleased, and they can pat themselves on the back as having ‘made
it through the storm’, right? Well not really. I don’t want to be a dampener on
a struggling director’s hopes as there are indicators we can be cautiously
optimistic about. The problem is based on past experience having been through
three recessions that the most dangerous time for a cash-strapped company is
when coming out of recession. The reasoning behind this is simple. If the ‘struggling’
company has cut back to the bone and cannot raise personal finance; ploughed in
personal/family cash; reduced staff; sold off assets/stock; maxed out the
company credit card and the banks being as helpful as ever and refusing to lend
– the ‘straw that breaks the camel’s back’ is usually an influx of new orders.
You may think this is nonsense and that any bank with an
ounce of commercial common sense would see a full order book as an indicator of
something positive. Not so. We have had many cases where the order books have
been full to the brim and the banks have refused to even provide an overdraft.
They (The bank) did by the way allow an unauthorised overdraft of as much as
the company wanted but at 27.9% APR. Factoring may help but my experience is
this usually creates more problems than it solves for smaller companies.
So when orders start to increase and the bank account is
empty what can directors do? There are few points to remember. Take a common
sense approach and remember that when a patient has been very ill and is still very
weak then start with a little of the right food often rather than gorge on too
much of anything all at once.
My meaning here is that is important to gear up slowly if the
company is cash-strapped and do not over trade and take too much on board. It
is easy for a director to convince themselves that the more work you do the
better things will get. Not necessarily – it could make matters worse. The
fastest way to lose a good name is to let customers down. So, it’s important not
to take work on that cannot be fulfilled competently and effectively and
getting paid.
A director should set reasonable achievable goals and make
sure the accounts/finance department talks to sales and is able to fund the
growth. Ensure regular and frequent meetings are taking place and this is the
time the director must have his/her finger on the pulse and work even harder
and smarter.
If directors are a ‘one man band’ then they should be talking
to someone other than a life partner/spouse that will provide an objective, informed
unemotional view of the situation. This is an ideal time for the
accountants to step in and provide support I would suggest. Whoever the
director talks to they must keep the dialogue on-going until the company is
back on its feet to make sure there is no disconnect between the service you
have provided and what is paid in – not owed in. A business can grow on
promises of payment – they need cash.
The nature of the business the directors are involved in
will also matter. For example if they are in a building related trade then it
may easier to get clients to fund at least part of the project with up-front
cash. This can make a big difference to the chances of survival and not. This
course of action may be more difficult with other businesses and directors will
need to work smarter when providing the services to the client. For example is
it worth having a word with your key supplier and showing them the full order
book and offer to make them the sole supplier so they can see the benefit of
increased sales.
Whatever the director does they must take care and whilst it
is good to be cautiously optimistic it is foolhardy to believe simply obtaining
lots and lots of extra work in itself will solve the problem – it may just make
matters worse. Take care out there.
Written by: Mike Smith
