Armstrong Watson were approached by a lender as they had concerns about one of its client’s viability. They wanted Armstrong Watson to review the Company’s current position and to provide advice as to the viability of the business going forward.
The Company, which primarily provides security services and CCTV monitoring, operated an invoice financing facility. It had been experiencing significant cash flow problems and the lender was becoming increasingly frustrated with the lack of accurate and timely information.
As a result, the Company were making repeated requests to the lender for an advance of funds over and above their agreed limit. They were struggling to manage their cash, which led to them requiring funds over and above their availability on the facility and without the support they were unable to pay wages and normal trading expenses as and when they fell due.
In addition, the Company had made a request to its funding for an increase to its facility to provide additional funding to assist with the growth of the business as it secured new longer term contacts.
The Company had a good level of turnover and were winning new contracts however the cash position did not mirror this position and the management team were struggling to identify the causes for the cash flow difficulties.
The management information provided to the lender was also inadequate and management were unable to predict accurately the level of funding required to support the business.
These issues meant that the lender was struggling to provide the support requested as it had no oversight of the future funding requirements whilst also having concerns about its viability.
The lender needed to understand the precise amount of additional funding required together with a timeframe to repay the outstanding monies and an estimate as to when the invoice finance facility would be back in formula (and therefore the lender’s exposure would be back to normal levels).
Given the different issues being faced by the Company, it was decided that this would be achieved via a multi-stage engagement.
We were asked to work with the Company to understand their 12 week cash-flow so that the peak funding requirement could be identified and to understand how long the Company required the additional funding.
Given that the cash flow difficulties were a consequence of poor cash management, Armstrong Watson were also asked to work with management to implement proper financial controls so that they had better visibility surrounding their cash requirements, which would then enable them to manage their cash flow more effectively.
Once the short term cash position had been established, stage two of the engagement turned to the medium to longer term funding requirements. This involved working with the Company’s management to prepare integrated 12 month forecasts which would assist the lender in assessing its exposure and what level of additional funding they were prepared to provide.
By working closely with the Company’s management, we were able to identify the peak funding requirement. The short and medium term cash flow forecasts assisted the lender in determining the level of additional support they could provide to the Company.
We also assisted in identifying areas where the Company could make changes to their processes in the initial 12 week period to better manage its cash flow.
During the course of our work, we identified that the Company were offering their customers more favourable payment terms that they were receiving from their suppliers and they were in effect paying their suppliers two to three weeks prior to being paid by their customers.
With our support, the directors effectively took control and understood their cash position as well as implemented changes to their operations to ensure that cash was collected on a more timely basis.
Through our support, the Company were able to demonstrate better cash flow management and a greater understanding of the importance of timely financial information and implemented a number of changes to the internal organisation of the business which assisted in them making a successful application to their lender for an increase to their facilities.