CAPITAL GAINS

MANAGING THE RECESSION
Bankers may be giving an impression of a return to normality, but for many practices a shortage of capital is throwing them on the mercy of their financiers, says John Toppin

ARE YOU CONCERNED there’s enough working capital in your architectural practice? In the good times many practices acted as unpaid, unsecured bankers to their clients with work in progress and debtors requiring many months of funding. Inevitably the recession has stretched firms’ ability to fund client work to the limit, with bad debts often threatening their survival.

Sharpened management of working capital has become an essential component of the armoury of every firm – particularly given the long lead times involved in architecture and the position occupied by architects in the commercial chain. Effective techniques to control debtors and work in progress better will, of course, reduce the level of working capital you need to seek from your bankers to plug the gap but will not eliminate it. Your firm may now need more access to its overdraft facilities. As many bank managers are under pressure to increase bank income or reduce the bank’s loan book, if you don’t prepare well for meeting the bank manager you may be in for a surprise. So what should you be considering?

Understand your numbers
Bank managers like transparency and firms that are clearly in control of their finances. If they don’t understand your business or the numbers they will find it difficult to support you. For example, if fees are behind, is this due to the loss of one client or is it a general trend? They will want to know how the company has adjusted its cost base to match lower fees.

Prepare a full set of management accounts, including profit and loss, balance sheet and cash flows. Calculate variances against both the budget and the previous year so that you understand the trends. Make sure you are able to explain the business story behind the numbers. 

Work in progress and debtors
If your current work and pipeline are in decline, the level of work in progress is likely to be falling too. The bank manager will be wary of linking your overdraft facility to work in progress if he is concerned that your balances include work which is likely to be unbillable – so review these balances critically.

He will also be interested in any amounts owed by clients that are well past due in your debtors ageing report, especially if they are material, as well as any clients who exhibit signs of impending financial difficulties. Conduct a credit review meeting ahead of your meeting with the bank manager so that you have up to date information on unpaid debts and any action that needs to be taken.

Facility letter
The overdraft facility letter is an important document. Ensure that you are familiar with all its terms, including any covenants. If you have underutilised your facility in the recent past, the bank manager may seek to reduce it unless you can demonstrate that you will need access to that level of funding in the future.

The bank manager could also suggest tightening the covenants. This gives the bank more opportunity to withdraw the facility later as the covenants will be easier to breach, although he will not say this. Review your performance against the covenants, actual and projected, and model the tolerance levels you are operating with.
The bank manager may attempt to impose increased bank charges for providing the facility or in the event of breaches of covenant. Being well prepared for the meeting will give you more negotiating room.

John Toppin, founder of Nomizon Associates, provides financial management advice. Contact (JavaScript must be enabled to view this email address), tel 07834 380290. For more on managing in a recession see www.nomizon.co.uk and www.jamescookecoaching.com or www.ribablogs.com

PARTNER REDUNDANCIES

Can they happen?
Redundancies for salaried partners have to be handled the same way as for other employees. Fixed share partners are often described and treated as self employed like the equity partners but their real status depends on the facts.  A self employed partner is not a genuine redundancy and the statutory rules do not apply. But this is a technicality – by redundancy we mean a reduction in the need for partners of a particular kind and such exits are redundancies in all but name.

What are the rules?
Partners do not have unfair dismissal protection but they are still protected by discrimination legislation. The partnership must not use discriminatory criteria to identify who should leave. If absence records are used, have the reasons for absence been explored? Age discrimination is also a key issue – partners have no accepted retirement age.

It is important that there is a clear and evidenced reason for selecting any particular partner.

How much will it cost?
The partnership deed or members’ agreement is the key document. This will normally cover how resolutions are passed, any rights of appeal, notice, any additional termination payments and how long it will take. This can lead to substantial payments, including accelerated payment of profit share and repayment of capital and tax reserves.

Adam Lambert is a partner at Barlow Lyde & Gilbert LLP