Re-assessing the financial position of your business
Our Corporate Finance Partner, Steve Plaskitt, shares his knowledge of re-assessing the finances of your business.
It’s never too late to re-assess the financial position of your business, especially if you are involved in long-term contracts.
Too often I see businesses attracted to the profits of a large contract, without recognising the funding implications until it is too late. By then, they may be in a situation that is too difficult or too costly to get out of.
Recent case study
We recently helped secure funding for a successful business that was exposed to an onerous contract agreement. We did this based on the business being able to identify and address its own working capital issues on these contracts and then seek external corporate finance advice from us to improve its management information and prepare accurate forecasts.
This involved a lot of hard work from ourselves, the funder and the existing bank. There was also a lot of effort from the client, the managing director and the in-house accounts team, as well as the new financial controller and external accountant. Fortunately, the Managing Director recognised the issues to allow plenty of time to keep his suppliers comfortable, and the funding was secured.
We worked closely with our client over many months. We identified the size of the funding required, the nature of security available for the bank, and the likely cash flow requirements on a daily basis for the next 90 days and the next 2 years. Furthermore, the client obtained short-term funding from friends and family to provide further headroom for the business.
We identified issues with customers and aimed to renegotiate terms with them. This was a case of putting the cart before the horse after it had already bolted (to deliberately mix my metaphors!).
All of this could have been averted if, a year earlier, the client had been able to identify financial forecasts before the company entered into significant long-term contracts.
Preparation is key
Before you enter into long term contracts, think carefully about the funding implications and the contractual terms. You must be fully prepare yourself before you go into negotiations with your customer. This is so that you understand the real value of individual aspects of the deal.
The funding of equipment and materials required should be matched with stage payments receivable on the contract.
Similarly, the payment of subcontractors or your own labour force should be covered by stage payments.
Shipping costs and allowance for the time required for the commissioning process should also be factored into negotiations. As should the impact of exchange rate movements.
For customers overseas, the terms of payment should be carefully considered, and you should speak with your bank about which forms of letters of credit would be acceptable and whether there is any support they could offer through their international trade specialist.
Many business owners feel that potential contracts with overseas customers are worsened at the current time due to Brexit uncertainty. Politicians suggest this is all to become very clear very soon! However, whilst it may be the case that there is clarity for the notion of a no-deal Brexit, this will not eliminate all uncertainty. There will still be the uncertainty of changes to future trade terms with different countries. This will still be influenced by political decisions in the UK and beyond. So uncertainty may reduce, but it will remain a key risk for many years to come.
If you are aware of existing long term contracts that could cause financial issues to your business, do not despair. Get on top of the situation as soon as you anticipate that it could get out of control. You may still find that you have enough time to address and make changes.