The power of doing it right!

19th June 2009
We have a very long established client, which although a big turnaround many years ago, has traded very strongly for the last few years and is in the fortunate position of having generated substantial cash reserves as a result.

With interest rates as poor as they are it has been quite a challenge to find a secure home for the cash that provides anything like a sensible return. There are deals to be done, but the price you pay is that you normally have to tie the money up for an extended period. As a result most of the clients "free" cash is now in longer term deposits.

The other interesting angle that has come about is the ability to pay key suppliers early and take not insignificant settlement discounts which are often available. This has been possible with a couple of significant raw material suppliers and has given an excellent return on the cash, by only in effect paying debts sooner. Nice!

Despite careful cash planning we recently hit a short-term problem. The timing of the cash flow unexpectedly worked against us. A couple of weeks before a significant deposit was due to come back from a long term bond, sales activity increased meaning increased purchases (which are now paid for on a 7 day cycle as a result of taking the really excellent settlement discount on offer) and also a big customer missed their payment date, resulting in a delay of a big receipt.

In a matter of just a few days the cash position changed. All free cash was tied up in long term deposits and we had some big payments to make and unbelievably not enough free cash!!

The relationship with the clients main bankers is excellent, and a good deal of time and effort goes into keeping it that way. Even though there are no loan or funding facilities with the bank (the client clearly being debt free) and the surplus cash is deposited elsewhere (as they cannot match the rates) we spend time ensuring the bank understand the business, get good quality management information within 5 working days each month and manage the bank account impeccably. You never know when you might need a favour.

This proved to be one of those times. A call to the Senior Commercial Manager with a request for an overdraft for two weeks of £175,000 unsecured was met with a positive response within 24 hours! Problem solved at a stroke.

The bank manager made a very strong point of telling me that we probably had the only unsecured facility of anything like this size within his region if not the UK, and the reason we got it was because of how the account and the relationship was managed. He said approving the facility was only possible because of the strong management information and our impeccable control of the account and facilities.

We often say, make your bank manager your best friend, and this just goes to prove why! Bankers are not your enemy, they can really help you solve problems if you manage the relationship properly!

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