Auditel Consultant:
Lee Freeman

Cash is King

11 Aug 2010 | Filed under: cash management, cost management, The Economy

It was with some interest, and I have to say mild surprise, to hear my 20-year-old daughter say yesterday evening that she had heard on the radio returning from work that the UK has slipped back into recession. The surprise is not that we may be back into a recession but that my daughter actually took any notice, although this is obviously a sign of the times that the younger generation are now taking note of these areas. However I digress as the interests of my offspring are not the subject of this article.

I do not know what data the report was referring to that my daughter heard, but it has been a long-held fear of economists that the prospect of a double dip recession is indeed very real. There are a number of areas of particular concern including the public sector spending cuts, the economic issues of our Euro zone neighbours and a stalling recovery in the US. I have explored these areas in some depth in previous musings so will not dwell on them now, but instead want to look at what businesses can do to help themselves if this is the case.

Back in the dim and distant past I spent a number of years working for a major UK accountancy firm in their Corporate Recovery department. When I first joined this team, I spent the first twelve months as professional assistant to the partner in charge of the department. This was invaluable to me and a number of the lessons I learned then are still relevant today. The biggest message I took from this time is the age-old adage that “CASH IS KING”. It was true then and is certainly true today, a business cannot operate without cash. The number of businesses I became involved in during that period who had simply run out of cash was amazing. In particular I remember one large local building company where the directors’ expressed utter disbelief that the bank had even called us in to undertake a review of them. I recall the phrase, “But we have grown profits the last 5 years, and turnover has hit £30m, so what is the problem?” being uttered to us. The flip side of that message is that the company had grown that is true but using an overdraft that had increased 5 fold in the same time. It was not the business that was funding its own growth but the bank. With no light at the end of the tunnel that business unfortunately went into receivership with the loss of a number of jobs.

It is also at this point of an economic cycle where the number of business insolvencies tend to rise, when we are coming out of a recession and not going into it. This may be as a result of overtrading, although as this recovery is expected to be a slow burn, with potential slips back into recession as we progress, this should be less of a worry. The bigger worry is that during the recession a significant number of firms have relied on the leniency of their creditors to keep going. I was reading with interest a Baker Tilly article recently discussing the “success” of the HMRC Payment Support Service Scheme. This scheme was launched in Nov 2008 and apparently within 3 months some 60,000 businesses had deferred over £1bn of “tax debt” and there are now some 200,000 businesses talking advantage of this scheme. The issue is that at some point HMRC will want their money back, particularly with a growing public sector debt position.

What has this all to do with cost management I hear you ask? Well to me it is obvious, by controlling and managing your costs over the long-term, this process also helps the cash flow of the business. Even better is the news that there are no upfront fees with our services either, we only get paid once the business receives the benefit of the lower costs in the shape of invoices under the new billing structure. There are also some other less obvious benefits. At a time when the raising of finance has become more difficult than before, the use of a cost management consultant will show to any finance provider that this business is serious, understands the issues it is facing and is taking proactive steps to counter the threats it is facing. Having met with a number of local bank managers recently it has become apparent that such use of my services would certainly help in an overall review of whether to lend or not. In the words of one “I can’t believe that everybody is not using your service, it is a no brainer”. He is currently reviewing his client base looking for those relevant clients that could especially benefit from my service. In the meantime, just remember to look after the pennies and the pounds will take care of themselves!!! Or will they?