An interesting case that I was involved in a few years ago was that of a Scottish carton printer which had experienced a period of losses and therefore cash flow problems. We were brought in jointly by the company’s bankers and its minority institutional shareholder, who were both on the point of losing confidence in the company’s management, to carry out a review of the business and its financial position.

In the course of our initial review we found that the cost reductions already implemented by the management team had taken the company to breakeven. This meant that, with the seasonal increase in activity then expected, the company was likely to be profitable going forward. However, the balance sheet was severely damaged because of the heavy cumulative losses. In addition the build up of trade creditors, mainly to a small number of carton board suppliers, meant that the company was unable to pay off its creditor arrears, even after any realistic expectation of cash generated from ongoing profitability.

The company’s bankers and institutional shareholders were unwilling to inject further funds into the company, at least until a period of profitable trading had been achieved. This meant that the company was very much on its own, with no access to any external funding to help with survival. I stepped into the business after the departure of the financial controller, and the immediate focus was on finding a route out of the cash flow difficulties. The major board suppliers were all covered by two credit insurers, so I put the case to the credit insurers that without a significant write off on their part, plus an extended repayment plan to pay down the remaining arrears, the company would not be able to continue trading. If the company ceased trading, significant losses would then be incurred by the credit insurers. We were able to illustrate the merits of our case and both credit insurers accepted the proposals, resulting in some 65% of the outstanding balances due to the main board suppliers being written off. This provided better visibility on cash flow for repayment of the remaining arrears over a number of years as well as an immediate credit to Profit & Loss and as a substantial Balance Sheet improvement.

This deal with the credit insurers was sufficient to convince the bank and the institutional shareholder to inject a relatively small amount of cash to act as a cushion should there be any bumps along the path to recovery. This gave the company the breathing space it required to move forward. The company was then able to trade normally, making the profits which had been forecast. This, along with the improved cash flow, was sufficient to eventually pay down the reduced arrears. There are three main lessons which I believe can be learnt from this example:

• When in a difficult position, all options should be evaluated and considered. This requires creative thinking and an open mind.
• Suppliers are often looked upon as a negative influence when in serious difficulty, but they often have a significant interest in a company’s future. Full and open discussions can result in a solution which works for everyone’s benefit.
• Difficult times can be challenging for everyone. Many management teams, even those with a long history, have not been in an extreme situation before. The value of experience cannot be overstated.