CASH IS KING MORE THAN EVER AS ECONOMY INCHES FORWARD - Birmingham Post 12 March 2010

West Midlands businesses continue to find the going tough, even as the recession is declared to be over.

For many owner managed and family businesses, orders remain hard to come by, and with price pressures remaining, profitability is coming from cost cutting rather than revenue growth.

What’s more, many banks, including the state owned RBS, are making life difficult for businesses by restricting finance or increasing the cost of it.

And life could get still more difficult in terms of finance, even as the recovery takes hold, as Liz Whitfield, a partner in Solihull accountants Jerroms LLP explains:

“More companies will fail as we climb out of recession.  Businesses will face the classic cash problem that when the order book expands, it brings with it the need to finance extra stocks and work in progress and, in turn, a growing debtor book, as orders become sales.

“This need for extra finance as things get better can create real problems for businesses if their banks prove to be inflexible.

“Asset based finance, such as invoice discounting, which provides cash advances against the security of invoices raised, can be used in some cases.  It is flexible but it can be expensive.”

The fact that even growth puts the squeeze on cash resources highlights a key issue, according to Richard Jerrom, senior partner at Jerroms LLP.

“The management of stock, work in progress and debtors is at the heart of the matter for privately owned businesses” he said.

“Goods and services should only be supplied on the back of good credit information and references should be taken on new business clients even in these challenging times.

“Systems need to minimise stocks and work in progress through careful management.  Sales invoices should have specified payment terms and be issued promptly.

“The terms should allow for interest on overdue accounts with immediate follow up and hot pursuit of overdue accounts being vital. Cash collected more quickly is a direct and effective response to pressure on overdraft limits.”

The current economic position poses particular challenges as Ms Whitfield explains: “The failure of a customer can bring a business down. Any change in payment patterns can suggest problems and should be followed up immediately.

“Most businesses follow the 80/20 rule with 80% of their profit coming from 20% of their customers.  Good managers review this regularly, but it is essential in a downturn when you can’t afford to support customers who are not contributing to the bottom line.”

Jerroms LLP regard working capital and cash management as being at the heart of a successful business.  “We make a point of looking at this with every client and providing constructive advice” said Mr Jerrom.

“You have to have good products, competitive advantage and a strong market but that is not enough without a focus on working capital, especially in the recession or the recovery.”