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Private equity specialist, Jon Moulton, tells corporate finance that handling cash smartly and ruthlessly is now a necessity. Dump DB pensions, be canny with R&D budgets and take money from the tax man are amongst his recommendations, reports John Stokdyk.
 

If ever there was a man for the moment, it's Alchemy Partners managing partner Jon Moulton. After castigating irresponsible Wall Street bankers on Radio 4 last week, he told a seminar at Chartered Accountants' Hall in London how to survive the downturn.

A qualified accountant and insolvency practitioner, Moulton is the turnaround professional's turnaround professional and now puts his skills to use as a venture capitalist. The downturn seminar was hosted by one of Alchemy's investment vehicles, COA Solutions, which emerged from the financial wreckage of the Cedar Group to stake a claim as the third biggest business software house in the UK.

With Merrill Lynch, Morgan Stanley and HBOS going into meltdown, Moulton quipped that even COA's forecasting systems couldn't have helped him pick a more appropriate day for the seminar.

"The banks are in a shocking state. They're behaving unpredictably," he said with little apparent sympathy. "They got themselves in a mess, because the banking system got into very complex products. Lehman had $28bn a week ago - and they were bust on Sunday. There's been a collapse of trust. People don't believe the numbers they're shown because they're so complicated."

While there was nothing to be cheerful, Moulton added, "It's going to be a great time for those in the restructuring trade. But it's a very small industry and the skills are in very short supply."

Time to focus even more on cash

Fear about the economy translates into pressure on prices and more desperation sales, leading to lower prices, and decreasing margins. "Watch what happens when prices go down," Moulton warned. "Currency goes down and margins will vanish. Lower profits mean less cash. So now we move on to important things - cash."

Having painted the macro-economic backdrop, Moulton then passed on some of the tricks and techniques he has learned as a turnaround specialist to help other businesses keep hold of their cash:

• Clever stock control - with customers paying less, "lethality" can creep into the business from stock building up in warehouses.
• Credit checking - during good times, companies often relax their attitudes to credit checking and tell their sales teams not to worry about collecting cash. Credit control becomes more serious in a recession. "You can hold cash in your business if you have a good credit controller, and credit checking has a serious return," Moulton advised. "Creditors will pay off eventually. But you have to move quickly and aggressively. Switch off supply rather than continue to feed a customer who is a late payer. Link sales commissions to cash, so the salesforce only sells to people who pay."
• Manage credit - this is where Moulton started getting cynical, with his advice that if you have some spare cash, "You'll do better if you spread it around the ledger. It confuses them." Among the techniques he suggested was paying your latest bills first - it will take your suppliers weeks to work out that you haven't paid the oldest bills. Or submit part payments - a "nasty trick" that will give you months of discussion about how it could have possibly happened. Deducting VAT from invoices rather than adding it is another way to build in administrative delay.
• Prompt payment - it's possible to negotiate cash discounts of 6-8% if suppliers are worried about your ability to pay. "It's good for you to get prompt payment bonuses - business quality improves very quickly," said Moulton.

Aside from day-to-day cash management, the other route is to look for funding sources, but the day of his downturn seminar was probably one of the worst ever for getting money out of banks, Moulton noted:  "And it might get worse. The banks are in retreat. They don't have any capital. Why would they continue? Their marginal cost of funds is less than they can actually get for it."

Leasing companies are in a smaller sector, but also in retreat, he added. It is still possible to raise money through debt factors, but volumes are down and pricing is up. "It's not a big market - and the same as asset finance, it's way down from where it was even a few weeks ago," Moulton said. The stock market, meanwhile, was still there, but had become so unstable that no one knows how to value companies.

"It really does mean cash is king in a way we haven't seen for ages," Moulton said. "You need to rely on your own resources because you're not going to get funding quickly enough."

One overriding feature of recession is that the behaviour needed to survive is the same behaviour that creates a recession, but company managers can turn this to their advantage, Moulton explained.

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"Fear overcomes greed. Keeping you job is important - people worry about paying their mortgage more than groovy holidays. Staff won't push for bonuses," he said.

People in financial difficulties perform worse and salesforces will have lower incomes. "This is probably a source of some comfort," said Moulton. "But there are opportunities to get terms of trade back in favour of the employer."

The balance of power has changed giving companies the opportunity to adjust benefit schemes, working conditions and the like. "To anyone with defined benefit schemes - you'd have to be nuts to continue them in this situation, because they're an exploding black hole. Ever dropping equity values will result in demands for money when the business is least able to pay it."

There are also no prizes for having too many people on your payroll in these times. If you need to cut, do it while it can still make a difference. Most people avoid cutting staff until they don't have cash to pay for redundancies, Moulton said. "That's a mistake."

Manage for survival

The first objective in a downturn is survival, not prosperity, he stressed. "Driving profits is secondary, which means ruthlessness in cash, reducing capital expenditure, inventory, and debtors. Keep any banking or lending facility you've got, because the replacement will be more expensive."

The survival approach could impose major changes on many companies - and some will need to adjust their internal systems to do so. "They need new key performance indicators (KPIs) - it's no longer about margin, but what's going to happen to the bank balance. What is the inventory and who many debtors are over 60 days," said Moulton. "The focus can change completely, so change the first page of the management accounts package from a P&L to a cashflow report."

Forecasting is more important than ever, he continued, because you have to forecast against scenarios that weren't even conceivable a few months ago. Run extra forecast to assess worst case scenarios and see if you can survive them and pay particular attention to sales pipeline estimates. Also get comparative industry data - "If the industry is down 20%, you're down 20% unless you can do something special. Forecasting really matters," Moulton said.

The downturn provides opportunities for those who adopt the survival approach. If your organisation is cash rich, and competitors are up to their armpits in debt, you can buy them. "This is the time to take out your weak competitors," Moulton said. "Deliberately cutting your profitability will destroy your competitors, because they can't survive."

Once you decide to go for survival, Moulton suggested it was time to put out the worst possible results and depress the bank manager. "That works very well. You may need to go to the bank - if you owe them a lot of money, that's actually their problem. They won't take write-offs now, but in a couple of weeks they will. So show them how terrible things are because you need to get the write-off."

Putting in a "nice loss" will also allow you to claim tax back. Or reclassify as much of your expenditure as you can as R&D and claim allowances back, he suggested. Even if the expenditure doesn't qualify, he said, you can "claim the money now and have the argument later."

Some of Moulton's more cynical suggestions drew embarrassed giggles and gasps from the 100 or so managers in the ICAEW's Great Hall, but doing nothing would mean "The economy will slow, profits and cashflows will vanish, inventories and debtors will go up and payables down, and insolvency follows," he said.

"Or you can plan ahead, be tough, and manage your business for survival. If you survive, you'll prosper in a few years time going forward."