Poor financial data can wreck a good business. This fast growth multi depot, company had sales of c. £30m but was facing the risk of running out of cash in late 2009-10. Keith Steven of KSA Group has been advising the board on an informal basis from January 10. We advised that the board should invest in a restructure of the financial reporting and business data production for some months, when the business encountered several mishaps in a row.
These events were beyond the control of the experienced board of directors. Obviously understanding what these hits to cashflow could mean, to the solvency of the company should not have been. So the investment in external consultants to assess the data production problems, build solutions and move the business from old fashioned DOS based systems to windows based systems that allowed interrogation of huge amounts of small transaction data, was important to aid understanding of how things would pan out.
When the company could not pay HMRC for arrears of PAYE and VAT, the bank (RBS) requested an IBR or independent business review. This was carried out by a panel firm. The directors asked Keith Steven to assess the options for the company and we set out Plan A and we also recommended a new bank and invoice finance provider. After the external independent business review the bank, was limiting draw down on invoice finance and this exacerbated the cashflow problems. KSA's Plan A included asking HMRC for a time to pay deal with repayments over 4 months. This was agreed and the proviso was that all future tax payments were paid on time.
The board then arranged to replace the RBS facilities and brought in Close Invoice Finance in November 2010. The company was on track, the company was making profits each month, banking facilities had been renegotiated and agreed. HMRC was being paid and up to date. As the MD said, "for us the worst was over, and we were looking forward to 2011 to be a turnaround and an even more profitable year for the business".
In the 2011 trading year the company had a good November, but then had severe snow in December which brought the Scottish Network to a standstill for 2 weeks, and other depots were partly closed for nearly 10 days on the run up to Christmas, the bad weather continued in January 11 and the drop in turnover effected month end figures dramatically.
Another factor, which has significantly hit the business is fuel prices. Even with a fuel price escalator, the systems were still slow and the escalator was always in arrears. In other words the company wasn't recovering the increased fuel prices quickly enough anther hit to cashflow. In April 2011 the company's major customer moved its accounts payable dept to India. Throughout the process, various teething problems occurred. These resulted in their payments being received later than expected and significantly lower than expected.
As 2011 wore on, world trading conditions impacted the company further and several bad debts had to be written off. However, the business was now seeing the benefits of the improved financial management systems being driven by the new FD, who had been brought in to the company in early 2011. Costs of each depot were now more fully understood and two were closed. The board drove a project to analyse in depth, every aspect of the business profile to establish customer contract profitability against turnover achieved, and further analysed in detail all operational functions to remove wastage and ensure cost efficiency in every area. Despite this good work and further cost cuts being implemented, the turnaround wasn't fast enough and cashflow continued to tighten, a further tax debt had built up!
This time despite KSA's best efforts, HMRC wouldn't agree to a time to pay deal of 100p in £1 and the company chose the CVA option to reserve the business and repay creditors as much as possible.
Once again the bank put in the same IBR team for a review and it stated, in writing, to the bank that the CVA would NOT be achieved. Fortunately, we proved them wrong with over 99% of creditors voting in favour - including HMRC for over £1.5m of tax liabilities. Initial monthly payments are £9,000 per month, into the CVA scheme and the proposed dividend is 38p in the £1 over five years.
The moral of the story as ever is cash is king, but also that poor, incorrect, or old MI management information can destroy a strong business.
Although this is quite a big case there are many more cases that we do where the company is much smaller.