Cashflow Management for Biopharmaceutical Manufacturer

Case StudyBackground:

The company had undergone a difficult period where a transformation of the business had not delivered the expected sales growth.  This resulted in it carrying significant overheads and therefore making a loss and putting severe strain on cashflow.

The board had begun the process of changing the management team and two non-exec directors had stepped in to run the business on a day to day basis.  These issues were also placing the incumbent finance manager under increased pressure that he was not able to cope with, resulting in him leaving the company.

Challenges:

The business faced a number of challenges.  Firstly, cashflow management and forecasting was an issue.  Suppliers were being paid late resulting in disruption of deliveries and the company was placed on a proforma basis by a number of its suppliers.

Payments to HMRC and the company pension scheme were also behind by several months.  The shareholders had made a number of loans to the business in the previous 15 months.  However, they were unwilling to commit further funds in the absence of short to medium term visibility of the company’s cash position and needs.

Basic financial processes and controls were either not in place or not being followed.  This meant there was a limited audit trail on some transactions and journal postings.  Many month end reconciliations were not being performed and there was an apparent lack of understanding on how the accounting software should be used.  Certain accounting processes were overdue resulting in inaccurate reporting of business performance.

The other member of the finance team, the finance assistant, was also now being placed under extreme stress trying to cover for the absent finance manager, handle numerous supplier phone calls and perform her own duties.

Finally, there were issues with the company’s US subsidiary on tax matters that were beginning to impact trading in the US; and the day to day reporting of the main business was complicated by a recently started JV to develop a new product.

Solutions:

The first step was to bring the cash management under control and provide the directors with the necessary short to medium term cashflow forecasting to give the shareholders the confidence to provide additional short-term funding when needed.   A meeting with the bank was arranged to ensure optimum use of the invoice factoring facility within their conditions.

The directors had already agreed a payment plan with HMRC and weekly payments with two key suppliers.  On top of this discussions were then held with the supply chain team to identify crucial supplier payments to ensure continuation of production whilst also trying to reduce the large number of low value overdue supplier balances.

The next step was to focus on giving the directors confidence in the operating results by performing a full review of the current balance sheet and P&L.  This identified a number of issues that further reinforced the need to introduce stronger financial controls.  The consultants supporting the accounting system were asked to provide an assessment of how we were using the application and where improvements could be made.

The review process also identified issues with the prior year end reported results that needed to be addressed before completing the submission of accounts to Companies House.  The prior year tax return which was overdue was completed.

Throughout these activities, support and mentoring was given to the finance assistant to remove the immediate pressure on her; listen to and address her concerns; develop a plan to reinforce the finance team and deliver the career development she was looking for, including continuing in her professional studies.

The US tax issues were concluded by providing tax advisors with long overdue business information.  Furthermore, a proposal was made to the board on how the US entity could be operated on a different basis.  The complications of the JV reporting were resolved, and clear reporting processes put in place to ensure full visibility to both parties of the JV and the body providing R&D loan financing for the project.

More recently, a new CEO has been appointed and work has commenced on changing the nature of business performance reporting and starting on the budget for the new financial year.  This budget process will allow for a complete review of the internal reporting structures including the creation of formal cost centres on the accounting system for better cost oversight and control.

Benefits:

Overall cashflow has improved with better visibility increasing board confidence; issues with suppliers reduced significantly; and other outstanding payments issues addressed.  Management has a clearer view of the business performance even though there still remain some issues to be resolved.  The business is on a far more stable financial footing to address the opportunities and challenges ahead.

EFM Expert: Ian Wint