CAIM member John Dunleavy suggests a few simple questions to ask yourself if you are an SME lender wanting to check the pulse of your borrowers.
Having spent the best part of 10 years working within the restructuring unit of a large bank, I had the opportunity to see first-hand some of challenges facing businesses and to determine how best to manage that situation while at the same time protecting the bank’s position.
Cash flow problems
The issues facing businesses are more amplified within the SME space where the depth of management skills and resources available are so much lighter. Business owners and managers in the main work very hard, but circumstances sometimes (as in my time, a deep recession coupled by a lack of credit) mean that, despite their best efforts, businesses are unable to keep the ‘fires in the furnaces’ going. In short, they start to experience cash flow problems and in a lot of situations they run out of cash.
As someone who had responsibility for running a team managing a portfolio of cases, there were a number of relatively simple questions I always asked myself: things that I very much used as warning flags or tell-tale signs that a business was in difficulty or likely to soon get into difficulty. While certainly not exhaustive, for me they were always very good indicators and, more importantly, they could be relatively straightforward to determine. When a business starts to experience liquidity problems, time is always of the essence.
Let me share these with you;
Does the business always seem to be in constant turmoil, lurching from one crisis to another?
Is the business constantly in an excess position (overdrawing on its overdraft facilities) or requesting temporary excesses to be covered? Clearly struggling to meet its day-to-day payments.
Are there delays in meeting management information (MI) covenants for the provision of MI to the bank or funding institution? If so, you must ask why this is the case.
Are statutory filing dates being missed for the filing of accounts or annual returns with the company and directors leaving themselves open to fines? This always caused me a concern.
Are scheduled bank meetings and periodic sit-downs with the management of the business being cancelled or pushed out to a later date? There always is a reason behind this.
Are PAYE/PRSI returns or VAT returns not being filed on time? This to me was a flashing red light. I regularly asked customers to provide me with a copy of their Revenue filings and payments report.
And finally, can the customer provide an aged debtors and creditors listing? This is something I asked for periodically.
Clearly, if the customer operates an invoice discounting facility, one would expect the debtor book to be well-managed, but good credit control, and more importantly credit underwriting, are essential at all times. A worsening of debtor days could well be a symptom of both poor control and possibly underwriting in the first place. The first question anybody in business should ask themselves before they contract for a sale of goods or services is: will I get paid?
A lengthening of creditor days over and above terms of trade (which are generally 30 to 60 days) is often associated with cash flow problems and the need to adopt a policy of whoever shouts loudest gets paid first! As referenced above, it is often the PAYE/PRSI and VAT that gets held over to allow the business say on top of the other day-to-day running expenses.
Just ask yourself or your customers some of these questions on a regular basis and it may well be that you get an early warning of difficulties to come and – crucially – valuable time to try to work with the business to overcome them.
John Dunleavy B. Comm, FCA, runs his own advisory business, Waltham Advisory, and is a member of CAIM.