As the year 2012 unfolds with an on-going Euro crisis, an economy at best flat or in recession and a reduction in the availability of bank credit, financing is likely to become more of a strategic priority for every business.
This note will explore “internal” finance and subsequent notes will address that the external finance options covering grants, debt and equity.
As there is always a cost attached to external finance it should be explored only after all internal financing options have been considered. These include :-
- Reduction of Debtors
- If the Company has trade debtors of £750K averaging 90 days and reduces this to 60 days, it generates £250K of cash. As old debtors are generally riskier, controlling debtor days should be a strategic priority for every business.
- Cost Reduction
- Every business should review its costs monthly with comparisons both against budget and the previous year to identify any anomalies, negotiate improved terms with suppliers and reviewing all of its costs on an ongoing basis.
- Reducing Liabilities
- In a time of uncertainty, long-term liabilities such as leasehold liabilities and unsustainable levels of debt should be reduced or eliminated altogether. Landlords would far rather have a tenant in occupation looking after a property and making some contribution to the rent than be left with an empty property which is difficult to re-let.
- “Clever” Contracts
- It is more important than ever that long-term contracts should be negotiated as well as possible. Rather than simply asking for payment on completion, everyone should be thinking about mobilisation or commissioning fees at the outset, interim payments, options for revenue sharing and early payment on completion. Where Intellectual Property is involved, this will involve more complex discussions around exclusivity, ownership and territorial restrictions.
- Supplier Relationships
- Conventional wisdom at a “micro” level is that it is smart to “chisel” prices and stretch creditors as far as possible. At a “macro” level this reduces margins to unsustainable levels and slows down the circulation of cash in the economy with the overall result that everyone loses. On the other hand, if one demands excellence of service from suppliers in exchange for fair and prompt payment this will improve supplier relationships, increase innovation in improved product and service delivery and foster an environment in which everyone wins.
- Re-allocating Resources
- As work patterns change increasingly frequently, flexible staffing arrangements are essential to ensure that employees are as productively engaged as possible and it is essential that a climate of goodwill and flexibility is maintained with all staff to ensure that the business can be run as efficiently as possible for the benefit of all concerned.
- Everybody wants “more for less”, the “good old days” have gone forever and this is the “new normal”. Continuing innovation must therefore be central to the strategy of every business to meet constantly increasing customer expectations. By way of illustration, we have developed a portal for employment law - Employment Portal - which provides a comprehensive online employment law service to help and support clients at a fraction of the cost of a conventional employment law service – try it and see!
All too often these basic ideas are overlooked but none of them is difficult and, taken together, can transform the financial position and prospects of a business in a relatively short space of time.