VOLATILITY: Managing In Volatile Times – Balancing the Books

What has changed in 2009?
Barry Jordan: We are seeing banks become more circumspect about chasing companies’ business. This attitude may manifest itself in refusal to roll over line of credit automatically. So do not assume that retaining current facilities, probably signed off calmly each of the past five years, is fait accompli this year.
Be prepared to argue your case in 2009. If you operate with unarranged facilities, you may find these are no longer extended even in tight months where little bit extra might tide you over until the busy months.
Jamie Schmidt: We’re advising clients to do four things: profile their finance arrangements, inform the bank of the state of play, monitor closely and prepare strongly for renegotiation. Now is good time to make sure the bank is on your side, work alongside them and keep them up-to-date. Make sure you are keeping close eye on your covenants and not breaching your agreed terms.
Management must also be acutely aware of the mix and the maturity of loans – if you have long-term funding in place now that is very good position to be in, and you should be making sure you do not have too much debt maturing simultaneously.

What about debtors?
Jordan: For debtors that are not paying on time, don’t just give them phone call or an email when their unpaid bill ticks over to being two months’ late – keep in touch with them and contact them during the month and most certainly as bill becomes overdue.
Is there core debt there that needs to be resolved? If the vanilla solutions of calling in security or extending terms aren’t working, don’t be afraid to consider what may have been “out-of-the-box” resolutions. For example, you may choose to take an equity position – shrewd businesses will be considering how to seize opportunities to significantly alter and improve their market position.

Do you see businesses using the IRD as funding line?
Jordan: Some do and it is very expensive option. When credit pressure is brought to bear, sometimes the facelessness of the IRD appeals to management and PAYE and GST amounts are redirected to suppliers. This is often first step down the slippery slope to insolvency. In the case of PAYE, directors should remember that the special nature of the employment relationship could see them personally liable for any misdirected payments.

What should CFOs and business owners be thinking about?
Jordan: Most CFOs and business owners are conditioned to develop an obsession about the cash position of their company. The cash position, not merely the trading position, is priority number one.

What can they do?
Jordan: If they detect an adjustment to the company’s position is required, they will often pull one of four obvious levers: squeeze creditors, defer tax, lean on the bank for credit, or pursue outstanding debts more forcefully. For several years, it may have only been necessary to pull one of the levers to get the company back on an even keel – but in volatile times CFOs may start to pull more than one, and in some cases yank them all quite hard. If you’re not already gripping the handle on some of those levers now, you may have left it too late.
Schmidt: It is also crucial to make sure you have good systems in place, providing you with the up-to-date information and accurate information that you can afford. This is not time to be working in the twilight, let alone in the dark.
Management must also ensure this current information is reflected in the company’s accounts. If subsequent events occur that confirm pre-existing condition was present at your balance date, you must make an adjustment and ensure the numbers reflect the impact of the event.

Do the continuous disclosure requirements impact on companies in these volatile times?
Schmidt: Well they do in that companies have to get it right. Good advice on disclosure requirements is very important, so we’re saying to clients that they should use the legal resources at their disposal to ensure they are across how and when they must disclose, and whether any exemptions to the rules apply, such as freeze periods.

What else should be top-of-mind?
Schmidt: Valuation of assets and liabilities in financial statements has to be priority. In difficult conditions, it is the speed and quantum at which fluctuations occur that is of greatest concern. You want to avoid unwelcome surprises in your accounts at year-end.
From fair value perspective, continually evaluate areas such as your hedge effectiveness – make sure your testing is current and accurate.
A number of entities are finding their hedging strategies no longer meet the effectiveness requirements under the accounting standards. This may have significant impact on derivative valuations, affecting profit immediately instead of over time.
Similarly, the valuation of investments such as shares or investment properties must be kept as up-to-date as possible. If there has been significant or prolonged decline in value you must report it and factor in what is coming up.
You may traditionally do valuations or impairment assessments or reviews annually or six monthly, but in the current environment you should consider doing an appropriate amount of work on this each month. Start preparing, organise your experts and don’t leave it too late.
If reset values in particular are declining, think about the impact on your company’s payment of dividends. As the write-down of investment and asset values flow into your accounts, make sure you still meet the solvency test requirements and are able to pay out.

Everyone is saying cash is king – how can management teams improve liquidity?
Jordan:Liberate cash from non-core assets. This is especially relevant in family-run businesses where “lazy assets” such as the company bach or the firm yacht should be turned into cash. Paring back stock is another way.
We worked with wholesaler that had whole warehouse full of gear, significant amount of which had not been used for years. Turn this into money by selling it aggressively – not only will you get the money in your account but you will also free up your valuable shelf space for expansion or rationalise your leased space.

What can be done in relation to suppliers?
Jordan: We’re advising businesses to rationalise supplier lines and undertake supplier reviews with view to consolidating – then squeeze and negotiate bulk discounts. Now is also the time to look at exiting non-key supplier relationships: the fact that they were helpful in the past or might be helpful in the future may not cut the mustard.
You also need to pay attention to the robustness of your own suppliers– unless you have particularly contractual relationship with your suppliers, don’t expect to get look at their books. But don’t let that deter you from discussing the state of their business with them. What are the key drivers from their end? Talk to suppliers, and work together to minimise the time that stock sits on shelves.

What is your advice for management teams preparing for ‘crisis mode’?
Jordan: There has to be an acknowledgement that simply because times are tough, regular problems such as regulatory scrutiny or litigation will stop emerging. In fact, plan for an increase. Businesses need to be prepared for disputes – and at the core of these disputes is evidence. The exact timing of these issues will be impossible to anticipate but the impact can be minimised hugely with little bit of attention to setting things up now, and setting them up right.
We expect there will be talk about the “fallout from 2008” for long time to come, whether it’s seeking to attribute blame or people seeking to recover their money. Some of the private equity deals where business was supposed to be performing in particular manner will unravel. Warranties will come under scrutiny. What was promised or expected can no long