CASHFLOW, CASHFLOW, CASHFLOW
What are the biggest challenges facing West Sussex businesses right now and what can they do about them?  I-SIGHT asked Krissan Carpen of KPMG in Gatwick to tell us.

1. All companies will be hit by a recession, but what are you seeing as the most common problems in order of severity?
In current conditions, even the most financially sound companies are finding it difficult to access banking facilities and are seeking ways to release cash from their business to fund investment, return to shareholders or pay down debt. Even when credit is made available, the repayment costs can be prohibitive. Expectations that banks would swiftly restore calm to debt markets have been dashed as they continue to hoard cash to protect weak balance sheet against a deteriorating economic background.

For this reason, liquidity will remain tight early in 2009.   The current issues that we are seeing clients and local businesses face include;

• Managing debt
• Cash Management
• Managing employment costs
• Rapid procurement and sourcing improvement
• Managing tax cash flow

2. What is the best advice for companies facing cashflow/liquidity problems?

We are advising all businesses to review their financing requirements, particularly those with facilities maturing in the next twelve months. Those with only Plan A need to review their contingencies and develop alternative financing strategies. Bearing in mind the current liquidity issues, this may be a time to consider other potential funders.

Cash management is about getting visibility and control of cash and understanding in minute detail how it flows around your entire business, where it gets stuck and why, and then doing something about it. Adopting robust 'rolling' cash forecasts will provide accurate up to date information so that a business can respond quickly.  It needs to be at the front of mind for sales, purchasing, marketing and every other area of a business.

It isn't unusual for a shift of focus of this nature to unlock trapped cash. We have seen the release of cash in businesses through a reduction of working capital by more than 20 per cent.

3. What are the key performance measures business should consider to sustain survival?
All businesses should have a short term cash-flow forecast. A robust 13 week short term cash-flow forecast will identify any potential short falls in cash as early as possible, and give management the time to ensure that the right actions are taken.
 
Remember - a business can make losses over a number of years and still continue to trade but it cannot run out of cash and still survive.
 
Other key performance measures which should be closely monitored include:

• banking covenants
• key working capital ratios (debtor, creditor and stock days) 

Monitoring these ratios should ensure that cash is not being tied up unnecessarily in working capital and therefore utilised more effectively throughout the business for other purposes (e.g. capital investment, dividend payments, acquisitions, etc). 
 
 4. Looking to recovery, what steps should a company take to make sure it is ready to benefit from an upturn?

We are urging businesses not to make the same mistakes that some made in the last recession where some cut costs in the wrong places, made too deep cuts in the right places or put a complete halt on investment .

In the race to slash costs, the key message is: Remember the upturn. It might be difficult to think about that time now but it will come, and when it does, you want your business to be ready to fly.

For this reason, robust businesses are still investing in very specific and rigorously scrutinised growth opportunities ranging from the development of new product lines, markets, customers or even distressed competitors.

They are though, still looking at all their costs through "fresh eyes".  Pockets of costs can build up in good times, when cutting back the key is to ensure as much of the remaining money as possible is squeezed to the front line. 
 
5. Many companies will be faced with reducing staff.  What is the best way of maintaining morale and ensuring that the best people are kept?
Employment costs are often a company's largest operational cost and can be the most challenging to reduce.  The least attractive option is to start laying off staff, but if a company is under acute financial pressure, it may not have a choice.

Before doing anything dramatic, it could be beneficial to first examine how to reduce the costs of employment policies. The highest costs include sick leave, working hours and redundancy costs.

However, changes to contractual terms and conditions require agreement from employees and employee representatives and changing long-standing policies is likely to generate resistance and challenge.  Tackling these issues is not straightforward, however, where the alternative is job losses, these options are likely to be seen in a more favourable light.

Krissan Carpen is a Senior Manager with KPMG's Restructuring team in Gatwick. www.kpmg.co.uk, 01293 652 000