Printing is no different to other manufacturing businesses in that it is struggling in the current economy with shrinking margins, rising energy costs and heightened competition.
Fortunately there are warning signs. The incidence of bad debts and slow-paying customers may increase. Making sales for the sake of increasing revenue is pointless if the customers don’t pay or take so long to pay the profit margin is eroded to zero by the costs of borrowing.
Money may be tied up in working capital. High stock levels and an inability to collect debtors will inevitably lead to a shortage of cash. Under-used plant and equipment not being “sweated” means valuable capital is tied up. Additionally it may also mean that staff who are assigned to specific assets are not being used to their full potential.
Consistent and material cost over-runs may be the result of a combination of inadequate costing and/or poor scheduling of work. This leads to higher than expected labour costs due to overtime and weekend work.
In a worst-case scenario, the printer could effectively be paying his customers for the privilege of working for them.
There may be an over-reliance on a small number of customers. Although this enables the printer to offer excellent customer service and build strong relationships, the very future of the business can be threatened should a major customer become insolvent and is unable to pay outstanding invoices. There are many examples of such “downstream” insolvencies.
But there are remedies. Keep debtors and stock levels to a minimum so that cash reserves are not tied up. Debt factoring or invoice financing can be a quick and effective means of converting sales into cash as soon as finished goods have been delivered to customers.
Assess each individual customer’s value to the business. Slow-paying clients who consistently change the scope of print jobs with minimal notice and who take up valuable management time may be customers you no longer want.
Credit scoring of new customers and setting predetermined credit limits are essential to ensure debts remain collectable.
Methods can be devised to speed up payment from debtors such as offering customers early settlement discounts and putting accounts on stop until payment. Cash on delivery for slow paying customers may be an option, or simply withholding finished goods.
A broadening of the customer base needs to be considered. If the printer is heavily reliant on one customer, it needs to consider credit insurance.
Manage the timing of payments to creditors so that adequate cash reserves are maintained.
Finally the tax office will often be sympathetic to a well-written submission and may consider payment arrangements should the printer be unable to meet his tax bill. This will assist with cash flow if the printer can adhere to the terms of the payment plan and be able to meet its ongoing tax liabilities for the new period not covered by the repayment arrangement.
Under-utilised assets should be sold. If they are subject to finance, the printer may be able to negotiate replacements that are more modern and can be used more efficiently. Before purchasing new machinery based on budgeted sales, ensure that these forecasts are realistic should all sales not eventuate.
The earlier the printer obtains specialised help the better the chance that a successful turnaround can be implemented. Turnaround experts can negotiate with the tax office and with other creditors and financiers. They can assist the printer in managing cash flow, and provide expert support in order to improve the financial performance.
James White is a partner at PKF. The Corporate Recovery team are specialists in providing services to individuals and businesses with financial problems.
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