The king maker

Cash is king, and Anglo European FD and former global Ernst and Young restructuring advisor David Evans warns it assumes even more critical importance as the industry goes back to work.

The past few weeks have been many things but they have, to a point, been predictable. We knew we were heading towards a three-week lockdown, and we knew that controls on social distancing were likely to be extended for another three.

And, after the initial shock of shutting down their businesses, companies have known what their costs are. Staff have been furloughed, they know their liabilities, their creditors and their debtors. That is, however, now changing as the industry comes back to work.

There are clear opportunities ahead for companies who get their timing right. The return to business nonetheless comes with risks attached.

Anglo European’s model is based on buying inventory from our suppliers, getting decent terms, turning it into product, and then getting paid by our customers.

What we don’t want is that model turned on its head where we are operating under reduced credit terms and not being paid.

That’s going to be a challenge for every business as we come back because those pressures on your working capital are going to be very difficult to predict – get that wrong and it can cost you dearly.

Directors and owners need to shift emphasis from the preservation of working capital to scenario planning, in order to be able to manage their working capital effectively.

At the moment it’s not about being the one to forecast the way that this plays out with 100% accuracy or being exactly right. You may get lucky but it’s very difficult to make that call.

It’s about having the visibility of your finances and being able to react quickly enough and to adapt your strategy so that you preserve cash. It’s about the ‘what if?’ scenarios.

Are you going to open up in May or June? How much of your businesses is likely to come back straight away – 20%, 40%? Will your customers keep paying you?

You need to run multiple models and scenarios – worst case, mid-case and best case – to say this is our starting point, and based on this set of variables this is where we are likely to be in six-months’ time.

This allows you to track and adapt your approach as it comes back. If you don’t do that you can’t plan and manage effectively and that is where a lot of businesses are going to be exposed.

No business within the window and door industry is immune from running out of cash, from the smallest installation business to the biggest names.

This includes coming back too soon, which carries a large number of potential pitfalls. Unfurloughing your workforce too early, or too many, is a big risk to your working capital. You also need to know that your supply chain is pump-primed to make sure that you in turn, can meet supply.

“If you take our specific scenario we need to know that our key UK steel suppliers are in a position to supply us. What do we need to do to release supply? How much do we need to pay them, and what are our credit terms going to be?

As we scale inventory, we know it’s going to place growing demands on our working capital.

Here are some of the things that businesses should be doing to get through the coming months.

Cash conservation. Businesses should be doing everything they can to control costs and manage spending. Not only during lockdown and the start of recovery – but also beyond it, in order to rebuild cash reserves and ensure adequate working capital levels post-recovery.

Scenario planning. When and how are you going to return to business and at what scale, and running multiple scenarios: worst case, medium case and best case? What resource do you need in place and when, against those scenarios, as part of a phased return to work?

Communicate. Talk to your suppliers about payments, which includes raw material suppliers, landlords – have you paid them, do you need to pay them, why haven’t you paid them? And talk about supply. Do they have capacity to supply you in the timeframes you need? Delay on components could have a critical impact on your cashflow. Make sure your supply chain is aligned to your plans to come back to work.

Timing of re-start. Monitor the macro economic situation. How is the economy doing? Are things picking up generally? Also, what are your key customers doing? When are they going to come back? Maintain dialogue with customers so you understand their plans, rather than being reactive to events.

Track recovery against your forecasts and react accordingly. Run scenario forecasts. If you forecasted a return at 40% of business are you on track, or are you running at 30% or maybe 50%? And how should you be phasing the return to work? Do you need to tweak those scenarios, staffing and inventory accordingly?

Use available support programmes. There are various financial assistance programmes in place to support business through the Covid-19 outbreak. These range from government-backed loans offered by banks to tax deferral agreements with HMRC. These can help ensure that you have adequate working capital as you return to work.

Build-up reserves. Companies are going to be coming back with very little left in the tank. This makes it critically important that they build-up reserves by reviewing ongoing costs and maximising margin. For example, steel reinforcement. You can save as much as £240,000 a year simply by buying direct. That goes straight back onto your bottom line and into your reserves.

Review your capital expenditure plans. You may choose to pause plans for capital expenditure in the short-term. Can you justify the capex? Do you defer, postpone or cancel because the capacity requirement isn’t there? Or do you continue to spend? There is an argument that investing in a downturn puts you in a position to capitalise on recovery.

Chase payments. Chasing payments is one of the most important aspects of working capital management that companies can fall down on during a period of disruption. It’s something they may be losing sight of simply because they have closed the doors or their accounts departments have been furloughed. The best companies will continue to pursue their debtors and their receivables throughout the crisis. That cash coming in is still the lifeblood of your business.

Buying reinforcement direct from source (eg, Anglo) can support fabricators in keeping control on their overheads. This includes average savings of 30%-40% on steels a year.

You wouldn’t buy electricity from the most expensive provider, so why would you continue to purchase reinforcement, if you could reduce your variable costs by going direct to someone like Anglo? Especially after a serious shock like this, when you’re trying to rebuild your business and your cash reserves.