Oiling the Wheels
Peter Ewen, managing director at ABN AMRO Commercial Finance, urges businesses to grow their way to recovery.
The economic uncertainty of the past few years has impacted almost all businesses in the UK, but none more so than SMEs, many of which have had to undergo big changes in their fight for survival. Tough times have forced many of these companies to streamline their business models, cutting the ‘flab’ and excess out of their operations by reducing costs and trimming headcounts.
Now, many of these newly-lithe businesses are actually finding themselves in a strong position to innovate and grow. ABN AMRO Commercial Finance’s recent research found that many SMEs are sitting on cash and not investing it because of the uncertain economic climate. These businesses are leaner and meaner than ever before, primed to take advantage of the opportunities to innovate and invest intelligently in growth.
Whether diversifying services, exploring export opportunities, restructuring or refinancing operations or looking to take advantage of mergers and acquisitions; there are many potential opportunities out there for businesses with the confidence to put their heads above the parapet.
Opportunity knocks
Many businesses are discovering that they are in better financial shape than predicted, having prudently built up war chests over the past few years. As we ease our way into 2012, now could be the time for those more bullish businesses to put these assets to work by looking at growth opportunities.
As business start to find their feet post-2011, some will have fared better than others and the possibilities for M&A bargains and competitive consolidation will increase.
With a growing number of business owners likely to be looking to sell, the time is ripe to explore strategic acquisitions. Our research shows that one in ten businesses are considering acquiring a competitor and almost a third of those will look to do so within the course of this year.
To make the most of this situation, acquisitive businesses need to organise their finances so that they are ready to react when the opportunity arises. However, the funding landscape has changed and businesses now need to look beyond the traditional forms of funding to structure deals and, importantly, understand the value in the assets they possess.
By using existing assets to fund acquisitions, astute businesses can steal a march on their competitors. Plant and machinery, finished products, property, raw materials and outstanding invoices can all be used to help fund a merger or acquisition without sacrificing cashflow at the crucial post-deal stage.
Expanding a business isn’t always easy and a lack of experience in M&A can feel like a huge barrier for businesses. Our research found that many lack the expertise required to undertake an acquisition or sale and are worried this could lead to poorly structured deals and financial headaches.
It is important that businesses in this position take the right advice and understand how assets can be best used to create the financial headroom required to make these deals work.
Progressive refinancing
When looking ahead, businesses must take stock of the changed finance environment: the traditional ways of financing growth are no longer available in many cases. Likewise, financing deals that looked good in 2008 may no longer be appropriate for today’s business needs.
After several years of battening down the hatches, managers are now shifting their focus from the day-to-day realities of keeping their company viable to making plans for the future. This positive financial planning includes refinancing to create financial headroom and to put the business in the best possible position for growth.
Much has been said of an impending ‘wall of refinancing’ that looks set to loom in 2012 as a result of the huge amount of debt accumulated pre-recession.
However, today’s ‘progressive’ refinancing is not necessarily a sign of weakness and distress. It is just as likely to be triggered by market opportunities or a forward-looking assessment of cashflow, costs and economic conditions.
In other words, businesses are beginning to look at their financial requirements proactively rather than reactively. It is important that businesses reject the temptation to sit it out and wait for a more benign credit environment to appear and instead take control of their own fate.
Export growth
As part of this new proactive approach to growth, some businesses are also looking to expand their operations overseas while those that are already selling abroad are now exploring markets even further afield.
European exports from the UK may have slowed slightly at the end of last year as problems in the eurozone deepened but, despite a challenging trading environment, this area will undoubtedly prove to be a vital revenue stream in the coming months.
Demand from other overseas economies is increasing and the government is also keen on encouraging export-led growth.
Factors such as the government planning to make the UK a leading offshore trading centre for the Chinese currency, the Renminbi, coupled with a flat base rate are creating great opportunities and competitive advantage for UK exporters.
Thousands of companies across the UK are already exporting a wealth of British products and services abroad and we’re seeing particularly positive growth from the engineering and management sectors. Yet opportunities still exist for many more to take this leap.
It can of course be a daunting prospect for any business to tackle a new market and selling overseas will create challenges for the first-time exporter. Cultural and business differences are a major consideration, especially outside of the familiar comfort zone of Western Europe. From time zones and language barriers to meeting etiquette and appropriate hand shaking techniques, cultural faux pas are high on the international business agenda.
However, the most pressing concern for businesses entering new markets in this current climate is arguably uncertainty surrounding payment and cashflow.
It would be easy to assume that the process of collecting money from an overseas customer would be the same as with a domestic transaction but there can be significant differences – particularly in terms of debtor days. For UK companies that are more accustomed to payment 30 to 40 days from the date of the invoice, the 90 day turnaround that is typical in some European countries will have clear cashflow implications.
Despite these challenges, the government is keen on fuelling export growth and will, along with Chambers of Commerce, provide general advice to those businesses seeking to take the plunge. On the financial side, maintaining cashflow via outsourced credit control or creating a cash buffer is absolutely vital when selling abroad.
Oiling the wheels
Above all when investing in growth, businesses need to ensure they are building on stable foundations. Even if there is money in the bank, without assured working capital businesses cannot have the financial confidence needed to strike out.
Without healthy cashflow, businesses cannot hope to survive for long, let alone grow or proceed with acquisition plans. SMEs must work to enhance their cash-management and educate themselves on the options for funding gaps in working capital in order to build a stable platform for growth.
Understandably, embattled SMEs have fought hard to hold on to cash and hunker down during difficult economic times. Yet, despite the strain of the last few years, many SMEs have emerged fitter and leaner than ever before, ready for growth but not yet grasping the nettle.
Now is the time for the battle-hardened among them to actively pursue growth and add momentum to the wider economic recovery.
Peter Ewen
Managing Director
peter.ewen@abnamrocommercialfinance.co.uk