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counting by numbers

As a financial year which few want to remember fades into the distance there are optimistic signs of growth in the year ahead – but in a significantly changed business environment.

During the recession the focus of many was simply on survival and consolidation but now they face new challenges.

For example, while the banks may be loosening their purse strings companies have to be far more persuasive to access the finance they want – and they may also have to look at other sources of funding to obtain all they require.

Owner managers who, until 2007, looked at their businesses as an ever- increasing pension pot to cash in when they were ready are now considering more strategic long term withdrawal.

Graeme Sheils, oil and gas partner at Deloitte, told Business Bulletin: “For an awful lot of companies, no matter their sector, 2009 was really about making sure their supply chain was efficient and examining their cost base and the efficiency of their operations. This mindset now needs to continue because many businesses have been dealing in the good times or in the growth cycle for many years.

“People were effectively doing their best to get through the recession by not taking any additional risk onto their balance sheets and reviewing the efficiency and cost effectiveness of what they do.”

He said that there are signs that confidence is returning and funding is becoming available for larger capital projects but there is also a perception that some companies are still not ready to take on additional risk.

“The bank lending market is coming back albeit the levels of lend, in terms of the multiples, are not as they were through the upcycle,” he said.

“If we are starting to come out of the recession then potentially there will be the opportunity for some very good deals to be done but the level of debt leverage is going to be lower and greater equity tranches are needed to support investment decisions.”

He said that while companies had become more acutely aware of the need to manage the overall efficiency of their businesses he believed some of the measures taken might have been short term.

“They maybe looked at reducing expenditure on things like marketing and cutting costs on IT support rather than looking at the longer term platform of how they arrange their IT systems and their internal business models.

Going forward they need to ensure their businesses are in the right shape for the long term.

“2008 and 2009 gave lot of people a very rude awakening – yes, on paper they have been quite successful and might have high net wealth, but they became much more aware of the risk in the money all tied up in the family business.

“They are now sensitive to the fact their business maybe won’t just go on and grow every year.

“They are more aware that the family wealth is tied up in the value of the shares or the value of the business and are now starting to be more strategically focussed and think ‘If I want to exit this business in three to five years there are certain steps that I need to go through.’

“There is a new reality because they suddenly see their hard efforts over the years have reduced has disappeared and are now working with their advisors and actually grooming the business for that ultimate realisation.”

John Black, a partner in Anderson, Anderson & Brown, the Aberdeen-based independent chartered accounts which has 12 partners, 160 staff and more than 2500 clients is also cautiously optimistic about the year ahead.

“The energy sector obviously dominates the local economy and the analysts’ predictions generally suggest that the oil price will remain above $70 a barrel throughout 2010,” he said.

“Recently there has been a degree of stability at that oil price which breeds confidence in the whole market. There has been a major focus on the banking climate and businesses have found it a big challenge to renew and continue their working capital facilities with the banks.

“That has been a different arena and has probably driven companies, in terms of that key relationship, to look at their existing business and what areas of it are doing well and aren’t doing so well and examine their cost base and their opportunities within that context.

“The banks are certainly being more selective when it comes to lending opportunities. The availability of debt funding has been an issue but again I think the signs are better for 2010. The major banks are saying they are open for business and the feedback we are receiving is that liquidity is returning to the market.”

He said that even a recession could have a silver lining which could be companies reviewing the businesses more strategically.

“Our clients are saying to us that that maybe their focus last year was to keep their heads above water. They are now seeing growth opportunities with a more stable and strong oil price and are going to their banks, not just to renew their working capital facilities, but to have development funding lines or additional facilities to pursue these opportunities. It is generally positive but the banks need to deliver in that scenario.

“When the banks are being selective the quality of the presentation is absolutely fundamental – it is a key point. We are doing a lot of work with our clients in assisting them on that. Although we are accountants it is not necessarily a numbers game – it is the strategic positioning and that strategic pitch and then the budget and the projections that go with that.”

He said there was also a rise in merger and acquisition activity.

“We are seeing a generally brighter 2010 and our work in progress on mergers and acquisitions is higher than it has been at any time in the last couple of years.”

Iain Imray, the finance director who jointly led the growth of Grampian Country Food Group to become one of the largest UK private companies with more than 20,000 employees and £1.7billion, says that banking behaviour has come full circle since the 1980s.

That was one of the drivers for recently establishing his company, The Abacist, to advocate for the current generation of business owners.

“Twenty years ago, businesses needed to submit a carefully considered plan based on the quality of cash flow and earnings to access funds,” he said. “Then we entered an era of liberal lending and easier access to debt. But the banking shocks and volatility of the past few years has promoted a more cautious ‘back to the 80’s approach to lending. Business owners must be better prepared and those owners too young to experience the rigors of banking 20 or 30 years ago need to relearn banking basics.”

“Ultimately banks lend to the people they understand the best,” he said. “The Abacist acts as translator between business owners and the banks. We can teach business owners the new risk-appraisal rules required to succeed in a new economy so businesses maximise their banking relationships and access the funds they need to grow.”