Case Story: Keeping your head when the banks are losing theirs
How can a company turn a million pound profit into a million pound loss in a matter of months? It was a question the Peter Charles team was confronted with when asked to provide an interim Head of Finance at a logistics and fulfilment company based on the South coast.
The company had been performing well, putting in earnings, before interest, taxes, deprecation and amortisation (EBITDA), of around 1m pounds on the back of a turnover of 4m pounds. Yet, from a positive of 1m earning, the company had plunged to a loss of 1m. The market hadn't changed. The only difference was the introduction of a new management team a few months earlier. The new team had come in with big plans for expansion but, with their background of working for larger corporations, they were overwhelmed by the culture of the smaller business. In particular, they were bemused by the manual systems. Their response was to invest heavily in new systems which didn't fit the business and just helped to drive it into the ground.
Peter Charles was introduced to the client by a major bank which had a stake in the company and had just informed them that it was not prepared to advance any further funding.
An initial investigation by the Peter Charles team underlined the serious position. A cash flow forecast suggested that the company would run out of cash in three weeks. A revised budget raised projected losses to an unsustainable £2 million. Creditors — aware of the company's difficulties - became increasingly strident in their demands for payment.
In response, the Peter Charles team devised an urgent action plan to keep the business going in the short term and return it to profitability in the long. On a company wide level, the Peter Charles team worked with management to ensure that operations were streamlined and that cost cutting plans were implemented. This rapid reduction in costs resulted in a cash break-even. The key for the Peter Charles team was that although they recognised that systems did need to be updated, they did so by listening to the long serving staff, the old timers, to see how they ran the business. Blending the old and the new returned the company to profitability.
Immediately, they undertook to relieve stress on key personnel. As with any cash problem, it was necessary to engage in short-term fire fighting. A creditor management plan was drawn up, distinguishing between a small number of large value creditors and a large number of small value creditors. The long tail of small creditors were paid in a timely fashion. Negotiations with the small number of large value creditors set up agreements about when they would be paid — with the ones vital to the continuing operations first in the queue. Another key measure was to reorganise the finance department so it could provide the company's directors with accurate and timely management information.
Of course, ensuring cash flowed in was as important as controlling cash out. The Peter Charles team negotiated with major customers to pay one month in advance for the following month's service. This provided sufficient working capital for the business to continue and gave some much needed breathing space. At the same time, discussions with banking services and the VAT-man — who agreed a six month payment plan — ensured that no unexpected surprises could scupper the rescue.
The final piece of the jigsaw was to secure the future by planning the disposal of the company in an orderly fashion to a competitor, ensuring the best deals for all stakeholders; shareholders, employees, customers and suppliers.