It has come as a shock to many manufacturing companies to find that previously secure debt facilities could now be seen by banks as ‘at risk’. Many banks have started to revisit current arrangements to free up scarce capital to invest in companies with a better return or risk profile. This already difficult situation is expected to be worsened in 2009 by a ‘tidal wave’ of pent-up demand from facilities due for refinance or which will need to be replaced because of credit deterioration.
So how should manufacturers respond? The most important factor is not to assume that facilities are automatically secure and then to develop a plan to consider cash management and funding arrangements as soon as possible. Any plan should include the following 4 key points:
1. Cash is most definitely king at this stage of the economic cycle.
Therefore short term actions should be focused on maintaining cash reserves
2. Understand current and forecast cash reserves and requirements.
Develop and keep updated a robust set of profit and cash flow forecasts. Make sure that these forecasts are realistic about the new markets realities, and if anything, err on the cautious side. Include a downside case, showing the effect of even worse economic conditions, should they materialise. In short be prepared and have contingency plans in place.
3. Be clear on working capital needs.
Understand what these forecasts mean to the business and what they will mean to the bank and other funders. Consider the options available to meet these requirements and if they can be met by current facilities. Be prepared to share these forecasts with the bank early and help avoid unpleasant surprises.
4. Make funding arrangements early.
Ask the bank for the facilities required based on these forecasts, including and additional facilities or extensions required covering the downside case. Get these facilities agreed and in place as early as possible – and before the situation becomes critical
Finally I would suggest that manufacturers involve their business adviser in these considerations early in the process. The advisers should have a good understanding of the funding market place and will be able to offer advice and support at all stages.