In 2003, I was working with Asyst International, a very successful IT business which had been funded by debt financing from the banking and insurance company HBOS plc. However, we were soon faced with an unforeseen problem that could have ended the business altogether – quite simply, we ran out of cash.
The majority of people think companies run out of money as they are ‘failing’ to become profitable enough. For example, some distressed businesses which are facing a cash shortage can find it extremely difficult to raise money through external loan and investment sources.
However, what is really interesting is that we were successful – it was a £3m business with double digit growth. Ironically, it was this success that was the root cause of our financial problems. We were quickly growing sales but the Terms of Businesses (TOB) we had initially set up with customers were not aligned to the ones we had previously negotiated with our suppliers.
For example, when a supplier shipped an order to us we had to pay for the goods straight away. Meanwhile, our customers had software or parts commissioned and installed before they had to pay us. Ultimately, this meant that the faster the company grew the more cash was consumed, essentially leaving the business out of pocket.
Focussing on sales and not paying attention to TOB is an easy mistake to make when you’re looking to grow your business. Like a lot of companies we were looking at the money coming in, and knew, with the growth of sales, that we could afford to pay our suppliers. At the time we didn’t really think about the terms on which we were being paid or paying people.
As the cashflow problems became more apparent we realised that something had to change as we were essentially putting the future of our company at risk. In order to overcome the growing problem, the management team had no choice but to turn its focus away from sales and onto cashflow.
After a difficult few months, terms were renegotiated with our suppliers. As a result, we were able to align our payments to suppliers with the money we were receiving from our customers. It certainly refocused us to look at the bigger picture of the organisation rather than just sales.
With this in mind we decided to restructure the debt we had with HBOS to ensure that a healthy cashflow was our first priority. However, to get the bank’s agreement to this we had to demonstrate our sales success and our commitment – one way we did this was to delay paying the directors of the business. Luckily the damage was short term and the business went on to not only continue its growth trajectory but also proved to be profitable, and two years later it was acquired by Access Group, after becoming one of its biggest resellers.
These delayed payments and having to pay for materials and services before taking payment highlights the importance of businesses, ensuring they set very clear terms and conditions. If you do not specify your TOB then you are putting yourself at risk of uncertainty which often results in misunderstandings. Therefore, you need to establish the arrangement between other parties involved, whether it is customers or suppliers, so that all parties understand their rights, roles and responsibilities.
As the economy picks up businesses across the UK will have strong growth plans, but as my own experience shows, sales and growth alone do not automatically create a financially sound business.
Jon Jorgensen is Group Director at Access Group.