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Finance chiefs face up to a cash flow challenge

As trading conditions worsen, many firms are shelving their growth ambitions and focusing on their cash position, obliging CFOs to strike a fine balance in lowering costs and raising capital
Uneven stacks of pound coins

Reducing expenditure without harming key operations has become a critical consideration for CFOs as the UK economy falters. At this time of great financial uncertainty, the task of raising capital also requires them to make increasingly tough choices. 

Dan Wells is the founder and CEO of financial leaders’ network GrowCFO, which also aims to make the role attractive to younger people. He reports that many finance chiefs have left themselves little room for manoeuvre, having already cut costs to the quick over the past two years. 

“It’s important that CFOs proceed with caution,” Wells warns. “Many out there are under pressure to reduce costs, but cutting too much can lead to the collapse of a business, while not cutting enough can hinder its profitability. CFOs must build trusted relationships with the wider business and collaborate regularly with other teams to create additional value. This can be achieved only when all departments are working harmoniously together.”

Wells adds that, while many CFOs will turn to the capital and debt markets to replenish their cash in the difficult times ahead, such finance will become more expensive as business valuations fall and the costs of borrowing. He suggests that they should “first explore opportunities to raise cheaper funds, such as asset-based lending and invoice financing”.

Being proactive and raising cash before it becomes a problem is inevitably what will separate the businesses that succeed from those that fail

Phil Tarimo is head of debt advisory services at the Dow Schofield Watts consultancy and a former specialist in corporate finance at RBS and Yorkshire Bank. He says that business lenders will be scrutinising applications more closely than they have been for some time. For instance, they will apply more exacting stress tests to management forecasts to ensure that a business can continue meeting its repayment obligations “if things don’t go according to plan”.

Tarimo warns: “In assessing the merits of using external finance, businesses need to be confident that their return on investment will be greater than the cost of the finance raised and can be delivered in an acceptable time frame.” 

Borrowing without ensuring that there’s enough slack in the facility to allow for unexpected bumps in the road is a dangerous move, he adds. Such bumps could vary from an unforeseen cost overrun on a firm’s IT upgrade project to a sudden reduction in demand for its products. 

An overwhelming challenge

Finding alternative ways to raise funds during times of great economic turbulence is no easy task, notes Vicki Taylor, principal at commercial finance provider Growth Lending. She says that, while many options are available, choosing the most appropriate ones can be “overwhelming for business leaders”. Taylor recommends that CFOs choose a lender with experience in their industry.

But borrowing clearly doesn’t appeal to everyone. Only 20% of small and medium-sized enterprises view debt finance as necessary for fuelling growth, according to Growth Lending’s recent research report, Don’t Bank On It

This might suggest cost-cutting is a more attractive option for most, but Taylor argues that “the perception that good business owners are able to manage, even when cash flow becomes challenging, is detrimental. Being proactive and raising cash before it becomes a problem is inevitably what will separate the businesses that succeed from those that fail. Persistence is also key to success in this respect. Businesses should prepare to be tenacious and approach several lenders if they wish to get the best match for the right price.”

Identifying the least dangerous cuts

While cost-cutting is an obvious survival tactic when times are hard, it can cause huge headaches. For instance, research published in September by risk management consultancy Kroll concluded that CFOs were “woefully in the dark” about data security. Its report, Cyber Risk and CFOs: overconfidence is costly, warned that cutbacks in this area could result in serious unforeseen problems.

“We often see that CFOs aren’t fully aware of the financial risks presented by cyber threats until there’s an incident,” says Greg Michaels, MD at Kroll and its global head of proactive services. “At that point, it’s clear that they must be involved not only in the recovery – including permitting access to emergency funds and procuring third-party suppliers – but also in cybersecurity strategy and investments.”

Elsewhere, many overheads – office rents, for instance – will be difficult, if not impossible, to renegotiate, while it’s typically hard to reduce the headcount of a company without spending significant sums on redundancy payments. One area that does offer significant potential for cost savings is energy consumption. According to research published by npower Business Solutions, it has become a board-level concern in 80% of companies.

As energy prices soar, businesses must ensure that they’re not using their office heating and aircon systems any more than necessary, warns Richard Fletcher, director at IES, a consultancy specialising in the environmental impact of buildings. 

But he adds: “At the same time, if they push energy-efficiency measures too far, they risk compromising the health, safety, wellbeing and productivity of their employees.”

Fletcher suggests that companies can make a few simple changes to how they run their facilities and, potentially, cut operational energy costs by more than 20%. This starts by forming a clear picture of consumption, including where the energy comes from (hedge or wholesale), and predicting future usage patterns.

“The goal is to find a trade-off between energy savings and comfort enhancement,” says Fletcher, who stresses that “decisions need to be made at board level to achieve the right balance in this tug of war”.