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Strategies for growth

Author: Gerry Donnelly
7 April 2011

(Featured in Midlands Business Insider Magazine - 1 April 2011)

Good products, experienced management and relevant management information are all prerequisites for companies looking to position themselves for the long awaited end of the downturn. Sales and marketing plans will also be updated, as the focus will once again return to profitable, top line growth.

A question asked by many is, if confidence returns to markets, and growth comes as a natural consequence, why do more businesses fail coming out of a downturn, than when the economy is actually in recession? One reason is that companies often fail to give enough attention to cash management. If cash is king, it is perhaps surprising that many businesses have a formal sales strategy, but no funding strategy.

In order to exploit opportunities for growth, successful businesses will have applied formal cash management procedures to maximise cash turnover. Among others, these will include:

• Funding facilities that are in line with the needs of the business
• Focused credit control policies.

It is imperative that businesses re-negotiate funding facilities early, to ensure they have adequate headroom to facilitate growth. This may mean seeking an increase in a traditional overdraft, or using more flexible funding lines, such as Asset Based Lending (ABL). ABL lending allows a business to leverage borrowing against the asset base of the business, such as invoices, stock, and plant & machinery. The most common method is invoice discounting, where lending is directly linked to the level of sales.

The level and nature of funding does not, in itself, provide the necessary headroom to allow growth. This will come about through the accompanying development of cash management procedures. Key to this is having strong credit control policies, to minimise debtor days and thereby maximise cash turnover.

Good credit control is not just about chasing debt, it is about ensuring that debt does not have to be chased. To encourage this, invoices should be accompanied by Terms and Conditions and explicitly state payment terms. Calls should be made to the customer before the due date, to confirm that all invoices have been processed and are free of disputes.   

If invoices remain unpaid, reminder calls and standard chasing letters may not be adequate. Where appropriate, customers should be suspended and, as a last resort, legal proceedings should be negotiated.

High debtor days may come about because the company simply does not have the resource to dedicate to credit control, in which case factoring may offer a cost effective way of improving cashflow. The level of funding is, once again, directly linked to invoicing, but factoring offers the added advantage of a third party managing the credit control. This can now be done on a confidential basis, so that customers are completely unaware of the existence of the factoring company.

In summary, businesses should re-negotiate funding lines early, formulate a cash management strategy and create headroom for growth. This will help ensure that a business can meet the necessary upfront investment in people, materials or capital equipment requirements, which may arise as a consequence of increased demand. Cashflow is the lifeblood of any business and it is the main driving factor behind growth.

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