As the Bank of England remains caught on the horns of its dilemma between maintaining high(ish) interest rates to curb inflation (its statutory responsibility) and cutting them to stimulate growth, many perceive the beginnings of a new era of “stagflation”, in which the economy grinds to a halt or enters recession while prices rise at a runaway rate.

It’s a bit unfair to heap all the blame on the Bank of England. The banks have largely ignored the centrally-set interest rate when lending to one another since the credit crunch began. And inflation – this time largely a function of the last year or so’s commodity price hikes filtering through into factory gate prices – is rising despite an environment of higher interest rates.

Council of war: companies need to come up with a strategy to beat the crunch

Whatever the central bank does, its potential effect the macroeconomic outcome is questionable. If the situation unfolds in the way that it looks increasingly likely to, we can’t rely on interest rate cuts to bail us out.

Living with Stagflation

Azhar Rana, partner at Littlejohn Chartered Accountants, suggests the following strategies for dealing with a prolonged spell of stagflation.

CASH MANAGEMENT
Cash is the lifeblood of a business. Management need to have enhanced focus on cash in a downturn. It could be that profits are lower, or that customers are paying more slowly than before, so less cash is available. Businesses that are dependent on loan finance should:

• Approach their bankers at an early stage to ask whether the credit crunch will affect their bank’s intention to renew facilities

• Find out if the reduced availability of funds will affect the bank’s mark-up on the finance provided

• Consider approaching other lenders, if you are unable to receive clarity on these issues

• Consider splitting deposits to spread risk, should the current banking problems deteriorate.

CASH FORECASTING
Forecast sales for at least the next 12 months. Different forecasts should be prepared under different scenarios. Look at the factors which are critical to the business, and vary these to see the impact on your cash requirements. It may be that achievement of sales targets is a key factor affecting cash requirements; vary the cash forecast to take this into account.

Build the forecast into a cash flow to ascertain cash requirements. If there is a shortfall of cash, understand the
reasons for the potential shortfall. If the shortfall is temporary, consider the possibilities of shortterm overdraft facilities. If the shortfall is considered to be ongoing, develop a plan to deal with it – this could involve a cost review or a sales drive to boost revenues.

COST REVIEW
A review of costs is the classic way of dealing with reduced profitability or losses. With listed companies, hand-in-hand with the announcement of poor results, cost reduction plans are implemented and no time is wasted.

Smaller businesses are often not as effective in dealing with reduced profitability. There are a number of reasons for this. Firstly, there may not be the availability of regular financial information to allow them to make rapid but considered
decisions. Secondly, the director of a small business is often very close – too close – to the business. This lack of distance prevents the making of reasoned decisions.

Costs may be fixed or variable. Variable costs need to be scrutinised to see if these can be reduced. One of the most
significant variable costs is usually wages. Making staff redundant may lead to an increase in costs in the short term, because of the attached redundancy costs.

DEBTOR MANAGEMENT
In an economic downturn, the risk of debtor default is higher than otherwise. Help yourself by:
• Billing on time
• Chasing debts which have exceeded their credit terms
• Reviewing credit limits for customers
• Asking for cash upfront where you consider your customer is in financial difficulty.

I recently had a case where a company mentioned that it was experiencing payment delays with one of its key customers. We obtained the accounts of the debtor from Companies House.

Our examination showed that the debtor was insolvent. We recommended to our client that they should carefully consider whether they should do any further business with this company.

Another one of my clients undertook a considerable amount of public sector work. They experienced considerable delays in obtaining payment, often being provided with numerous excuses. They reviewed their procedures to try to achieve better collection.

This involved phoning their customers a few days after the issue of an invoice to confirm receipt and calling a few days before the date of due payment to ensure that payment was going to be made on time.

STOCK/WORK IN PROGRESS MANAGEMENT
Review stock movements on a regular basis to:
• Minimise overstocking
• Achieve optimal stocking of fast-moving products
• Allow clearance of slowmoving stock.

For companies in the service sector, work in progress should be minimised by:
• Prompt billing, once a piece of work has been completed
• Billing on account for ongoing pieces of work.

CREDITOR MANAGEMENT
Consider negotiating longer payment terms and or higher credit limits with suppliers.

FIXED ASSETS
Consider using assets more efficiently:

• If you have unused office space, consider renting this out or moving into smaller premises
• Consider sale of assets to generate cash – office premises may have significant value and you could sell these,
taking into account tax issues, but remain within the premises through a lease
• Consider disposal of unused or underused assets – review your requirements on a regular basis to avoid overinvestment in assets.

20 WAYS TO TOUGH OUT THE CRUNCH

The Association of Chartered Certified Accountants says confident planning is more necessary now than ever. It recommends 20 ways of toughing it out:

1. Good financial planning is crucial – don’t be scared of facing and making difficult business decisions.

2. Start questioning early your credit facilities with UK retail banks.

3. Maintain a meaningful dialogue with your bank – and also with your accountant if necessary.

4. Review your bank charges. Could you switch accounts and find a better deal with a new bank? Could your current bank give you any special deals as a loyal customer?

5. When it comes to rolling-over banking facilities, watch out for hidden charges and factor those into financial planning if necessary.

6. Review all your direct debit arrangements – for the business and for your personal finances.

7. Try to clear credit card debt. But, if you do use them, try to pay without incurring interest and pay off balances before charges are incurred.

8. Chase your cash flow and, if you can’t make payments, then let your creditors know why and when they can expect a payment.

9. Pay special attention to cash flow forecasts and to monitoring cash flow. Ensure management accounts are up-todate, and that all key financial reconciliations are done, reviewed, and outstanding items cleared.

10. Tighten up credit control, cash collection procedures, and treasury management.

11. Look carefully at your forward order book, and the timing of future orders

12. Consider carefully current and future customers and their ability to pay – do not simply rely on credit ratings.

13. Pay particular attention to investments and major capital expenditure. Appraise rigorously and consider the extent to which such items can be rescheduled.

14. For those businesses which import/export, consider foreign exchange hedging and where this could be relevant to your business.

15. For December year-ends be clear about Stock and Work in Progress valuations and get early audit agreement to
valuation principles. Do the same for all “fair value” items on your balance sheet.

16. Look critically at staff requirements/ recruiting strategy. Instead of taking on new staff, you could consider paying for more paid overtime.

17. Consider, where relevant, temporary or fixed-term assignments but make sure you have weighed up the pros and cons against full time recruitment.

18. Be cautious in awarding pay rises and in setting up staff incentive schemes. Ensure such schemes relate to
profitability and cash generation as much as to growth. Be alert for distortions related to incentivisation schemes.

19. Critically evaluate your own financial drawings from the business. Are they appropriate in the light of current and
future profitability and cash generation? Cars? School fees? Home improvements? Holidays? Insurances?

20. Revisit the Risk Register as a matter of priority. Are all risks included, particularly financial/liquidity? Are risk mitigation measures still valid?

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