Improving working capital and raising finance

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Cash is the life blood of a business. How can a board of directors manage short term financial pressures and raise new funding?

In this article, Ian Lomas looks at how a board can generate additional cash through improving working capital, manage its lenders effectively and raise new funding from a variety of specialist lenders.

Where the working capital cycle is

The past two years have been unprecedented, which is a well-used word, but accurate. We continue to be in uncharted waters.

The impact of Brexit, Covid and now the war in Ukraine continue to have an immense impact on the whole of society. Whilst restrictions relating to Covid have now been largely lifted across the UK and other major economies, they continue to cast a shadow across business activity and will do so through 2022 and even into 2023.

As Government support measures are removed businesses are faced with continued disruption to their supply chains, increased supplier prices, increased labour, and fuel costs.

All this will have an impact on the working capital Cycle within the business, so managing this has never been more important. It’s worth remembering – cash is the life blood of a business.

To summarise managing the working capital cycle

If a business is feeling short-term pressure, creditors, both trade and other creditors, may be willing to negotiate a period of respite to create breathing space to help the business trade through a rocky period.

Examples of this from non-trade creditors could be:

  • a formal standstill agreement
  • a covenant breach waiver from a lender
  • renegotiation of existing payment terms over the mid to longer period on term lending facilities
  • a more informal short-term payment deferral.

We have produced a helpful guide on lender covenants and breaches, click here to read more.

Successfully negotiating breathing space during the working capital cycle will inevitably depend on having (and maintaining) good relationships with your key creditors.

  • A funder will be less likely to support a request for a waiver of breached covenants, from a business that hasn’t already fully engaged with them, during the preceding period.
  • Similarly, a landlord who has been restricted from obtaining possession will be less willing to negotiate with a tenant it perceives as taking advantage of the COVID-19 enforcement restrictions by withholding rent unnecessarily.

Identification of the key stakeholders of the business and then early and proactive engagement with these is crucial to establish the goodwill and trust necessary to negotiate a period of relief.

For a clear guide to organisational and operational restructuring, please click here.

If a creditor feels they have been appreciated and critically treated as a key stakeholder, they are more likely to be amenable to provide a short (or longer) term respite.

Turning to trade debtors, continual engagement and robust credit control of monies owed for goods and services supplied is vital.

  • Focus on cash generation 
  • Vet new customers thoroughly
  • Regularly review existing customers’ credit standing and payment frequency – has this changed? If so ask yourself why, this maybe a red flag
  • Consider any large concentrations across your customer base – are your ‘eggs in one basket’?
  • Ensure all your paperwork/ invoices are correct, with your terms of trade and payment terms clearly displayed
  • Contact the customer after delivery to check they are satisfied with the goods/ services supplied
  • Have a system to quickly identify all due /past due balances and contact them promptly
  • Consider credit insurance. If you have it, ensure you are abiding by the terms of the policy, notifying them as required, or this may invalidate any claim
  • If needed, put a customer on ‘stop’ – remember they have had receipt of your goods, or services and you are effectively funding their business.

For advice on what to do with unpaid invoices, please click here to read our guide.

Therefore, having robust internal credit control processes and procedures are vital.

To summarise managing the working capital cycle: 

  • Have a plan
  • Have robust credit control processes
  • Regularly review progress against your cashflow forecast
  • Engagement with key stakeholders is crucial.

How to go about raising new/ additional funding

Before approaching any potential funder, you should undertake a thorough review of your business and have a clear understanding of why the funding is required as it’s key to demonstrate there is a plan with a viable, well-run business, which is worth supporting.

If additional funding is required, usually the best place to start is your existing funder. 

  • Treat them as a key stakeholder.
  • Proactive engagement is crucial to establish the goodwill and trust necessary to negotiate an extension or additional funding.
  • Ensure the business articulates its vision and business plan, supported by realistic and evidence-based forecasts.

If the existing funder is unable to assist, the good news is the funding market has changed significantly post-2008, with the establishment of numerous new funders across the market. Remember all these funders are themselves looking to deploy funds and grow their own businesses. Many of them are specialists, who focus on certain industry sectors or into certain segments of the market. They are offering term loans, asset finance, IF/ABL, stock finance, export finance, property-backed facilities or cash flow loans etc. It is worth remembering however many of the funders often have different attitudes to risk, which may be reflected in their pricing.

Given there are now an array of funders out there offering different terms, rates or specialising in different sectors – I would recommend seeking professional advice from either a specialist debt advisor, or your accountants.

Benefits of engaging with a specialist debt advisor:

  • They should take time to understand your business, your funding requirement and purpose. Additionally, they should seek from you what you are looking for from a funder i.e., do you just want a transactional relationship or are you looking for a deeper relationship?
  • Having understood the above and with your consent they should be able to approach a selection of funders they believe best fit your criteria.
  • They should attend any meetings you then have with any of the funders and work alongside you each step of the way during the funder’s due diligence stage.
  • They can assist in the finer negotiation of terms, including the setting of any financial covenants ensuring these are set appropriately.
  • Remember the debt advisor is acting for you not the funders.
  • They should be remunerated by you not the funder, that way they remain impartial and truly acting in your best interests.

A summary: how to improve working capital

The next 12-24 months is going to present ongoing challenges. It’s a very different situation than we have seen previously – it should be remembered that more businesses go bust in the recovery stage than going in; this is because they are sucking in working capital.

It’s for this reason that cash is the life blood of a business so:

  • Have a plan around cash management
  • Identify the key stakeholders to the business and engage with them
  • Review your internal cash collection processes
  • Seek independent third party advice if needed if you are seeking additional funding.

Our Restructuring Advisory team have the required expertise and experience to assist you with any restructuring challenges you may face. Please contact us if you would like to discuss any aspect of this article or series.

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