Published: February 01, 2011
CFOs, FDs and treasury functions are coming to terms with the ‘perfect storm’ that currently hangs over the business credit areas and directly impacts their cash management techniques. Though we are now in 2011, rather than abating the storm is still gathering force. So what’s behind this, and how can we weather its effects and sail out the other side without storm damage? What is causing the storm to gather force? We believe there are five major aspects:
Why? Some key players have voiced their views:
Lloyds CEO Eric Daniels, in response to criticism, said recently that it wasn’t a question of the banks being ‘mean’ but that there is a lack of demand because businesses don’t want to take on debt.
China has produced its own credit rating agency which recently put most European countries’ debt into a ‘poor’ rating category.
BBA Chief Executive Angela Knight has claimed that banks are “providing good finance to viable businesses,” but firms were looking to cut debts due to the impact of recession.
Stephen Green, who is chairman of both London-based HSBC Holdings Plc and of the BBA, explained to Chancellor George Osborne the reasoning behind setting up the new group. In Green’s letter he stated “We agree with you the essential importance of ensuring that credit is available to viable businesses and particularly for the recovery. A variety of factors have an impact on this, and we recognise the collective role we have to play.” You will note the words ‘viable business’ used by different people.
Some major credit agencies are being sued, as a result of the credit crisis revealing the poor processes that agencies adopted to generate credit ratings. This has caused major upheaval for countries and companies alike, so much so that China has produced its own credit rating agency which recently put most European countries’ debt into a ‘poor’ rating category. In another response to the problem, Siemens is following GE and Volkswagen in initiating a banking licence so that they can finance deals with their customers and suppliers without the involvement of banks or other financial institutions.
Here we have major auditing companies realising that they will be sued for not identifying cash/credit issues that could affect a company’s status of being a ‘going concern’. The accounting bodies are seeking input from all quarters to establish what reports are needed for ‘tomorrow’s company’.
The changed landscape means finding new ways of dealing with customers and suppliers as new technology and the need for lean processes force them to review not just their own commercial terms and conditions but also whether the profitability of certain products, services and customers, once regarded as ‘cash cows’, could now effectively be loss-making ‘dogs’.
Innovative ways of financing supply chains have arisen. Marks and Spencer has just issued suppliers with alternatives to financing their payments through their own financial services division and Rolls Royce has instigated a supplier portal that has a vetting procedure which includes a review by their preferred banking partner.
In the UK, the sudden swing in spending policies announced by the coalition government is taking its toll. The curtailment of the ‘Building Schools for the Future’ programme has impacted many substantial companies in the construction, facilities management, technical infrastructure and computer sectors. [[[PAGE]]]
The new roles that are being sought by company boards include supply chain and demand chain executive positions which now have to embrace ‘reverse supply chain management’, corporate social responsibility on several levels including sustainability, regeneration, replacement and other policies that impact both customers and suppliers. These lead to policies such as ‘return to supplier’ that have also improved customer retention rates in the mobile phone and computer industries.
All five points significantly impact the working capital of any organisation and this in turn needs to be reflected in efficient cash processes that will drive the need or otherwise for credit.
The short answer is yes.
Going back to basics is key to creating a ‘viable business’ - the term we highlighted at the outset of this article. To navigate through the storm means determining those important criteria by which they will be judged ‘viable’ by any outside party; including shareholders, investors, banks, suppliers and ultimately customers.
Firstly we would set a course to examine the focus of cash flows. These cash flows can fall into various categories, such as meeting operational or strategic needs. Another category could be associated with the critical aspect of timings, such as considering when loans mature or when credit is required. Or it could be timing in the sense of having a firm grip on when customers pay and how or when suppliers receive payment.
Secondly it is vital to explore the processes the organisation has in place to collect, pay or distribute cash. These ‘as is’ processes need to be reengineered to a new ‘to be’ that drives out inefficiencies. But there are risks to avoid. Any re-engineering should include careful consideration of the impact on suppliers and customers. An overly introverted initiative to reduce working capital or improve cash flow could create such a negative impact on suppliers that they simply withdraw supplies of goods or services. Imagine the consequences if a key supplier were driven out of the marketplace. And from the customers’ perspective, would they want to deal with an organisation that does not treat them with commercial respect, particularly when loyalty and retention are vital to the company’s ongoing profitability?
Any re-engineering should include careful consideration of the impact on suppliers and customers.
Thirdly by determining all of the working capital drivers, and the weighting to apply in terms of their influence on the final outcome, it is possible to direct the attention of everyone in the business on the main priorities that will optimise working capital and thus underpin the all important measure of ‘viability’. The list of drivers, their weighting and the priorities will be unique to each organisation. The focus may be on stock-holding scenarios for one business, while for another it could be the design of complex cash milestone arrangements on projects.
The board has to get the boat out of the storm. And if there aren’t many ideas on what to do for the best, then simply directing all hands to the pumps might seem like a good idea. But while it may just keep you afloat it won’t help get you anywhere. And when the clouds disperse, to see your competition sailing undamaged over the horizon away from you would be very dispiriting. In these stormy times it falls to the CEO to take the role of navigator so that everyone’s efforts work together to take the best route with the least risk. The executive team together gazing over the stern and seeing the competition trailing behind is then very heartening.
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