Keep an eye open for warning signs

By Jon Severs, Monday 22 May 2017

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If you have spent many years driving the same roads, you will have become familiar with them, probably to the extent that you no longer need to check road signs or maps. Once-prominent landmarks now blend into the background, junctions are navigated on autopilot and you know where all the pinch-points are.

healthcheck

But familiarity can lead to complacency and complacency is a bad thing – particularly in business. If you’re not paying attention to what’s going on around you, you may miss a vital signal that something is not right.

To look at it another way, if you could put your business through a rigorous medical check up, would you be able to identify the bits that might cause the doctor to write up an urgent prescription? What about if you were to go through the same process with a possible acquisition target – would your guesses be more or less accurate?

Most print owners would like to think they would fare pretty well on both tests but Paul Holohan, chief executive of print industry merger and acquisition specialists Richmond Capital Partners, says they should be trying to prove their hunch by running through the key areas that determine a businesses’ health for their own company at least annually.

“Just like any health check, prevention is better than cure so it is good to review at least once a year,” he advises. 

But whether you are looking at your own company or another you have your eye on, what exactly are you looking for? 

The one thing that underpins everything else is cash. 

“If you haven’t got cash – if you can’t fall back on cash – you are knackered,” says Nigel Lyon, managing director of Pinstripe Print Group and a fellow of the Institute of Chartered Accountants. 

Holohan agrees that your cashflow is one of the surest vital signs of a business, as does Matthew Peacock, director of lean print consultancy Active PPP. 

“There are two fundamental problems in manufacturing: one, not enough work; and two, too much work. In both situations lack of cash is critical and running out is fatal. Get control of cash – sales is vanity, profit is sanity and cash is king,” he explains. 

Beyond cash, though, there are a number of other things you should be checking.

The ins and outs

Holohan reels off a list of things you need to check and then double check in terms of where money is flowing in your business: “analysis of sales; gross margin analysis; cost of sales analysis; review of overheads; depreciation policy; margin analysis; stock level review; additional funding requirements; rent, lease or buy decisions…” 

You get the impression he could reel off a fair few more assessments beyond even this list. Essentially, it is about tracking the pennies in your business or the one you are looking into and asking the same questions each time: Are these figures correct? How can I be sure they’re correct? And are there efficiencies to be made here? 

“Analyse sales to identify time-consuming unprofitable and slow-paying jobs that tie up cash in inventory,” advises Peacock. “The idea that any sale is a good sale can be tough to break. A classic trap is when a company starts extending lead times or failing deliveries and customers then actually increase orders to ‘book their place in the queue’ – the company thinks this is good news until either it clears the backlog (usually not) or the customers find other suppliers – at which point the bubble bursts with a consequent cash problem.”

Another example is to look at how accurately a company can cost a job, says Lyon. “You need to understand where the costs sit, and to really understand that you need a proper costing system and the majority of the SMEs in print have not got that.”

Peacock adds that waste should also be treated as an outgoing in need of attention: “Look in the bins and check invoices from waste disposal companies to see how much material is being removed. Vision in Print has helped more than one company get out of trouble by reducing material waste. No one gets hurt by reducing material waste.” 

Clients

Taking a look at the client make-up is also a key area for assessment. 

If you have a number of contracts for long-term work, reviewing these contracts for robustness, hidden charges, and any penalty charges is important, as is looking at past history with these contracts (are both sides behaving as stated) and assessing what fills the presses when this work is not running. 

The vast majority of work in the print industry, though, is more ad hoc, with verbal agreements in place for repeated work or perhaps just a high turnover of work from multiple sources. 

To assess these areas, Lyon says you need to look at what the business does and how well it is producing it. 

“The reliability of verbal contracts or regular work depends on your reputation; if you are excellent at what you do and you are the only person in town that does it then that ‘contract’ is probably very reliable,” he says. But if one of those factors is not in place, you can get in trouble. 

“If you have just got a litho press and you are doing B3 work for trade customers then that is going to be slightly less reliable,” says Lyon. 

Production 

“You need capability you can rely on,” says Lyon, bluntly. “If you can’t because the quality is poor or it breaks down, then things are going to go wrong quite quickly.”

Peacock stresses that a sure sign of a business not functioning as it should is the blocked artery of a bottleneck.

“Identify and quickly fix production bottlenecks which may not necessarily be big expensive kit like presses,” he says. “Sometimes it’s a bit of inexpensive finishing kit that could be subcontracted.”

He also says to watch out for inventory and work in progress piling up, but not enough material to complete jobs, and presses sitting idle. 

Tax or business irregularity

Let’s assume your business has this under control, because if you haven’t then a chat with a lawyer, rather than reading the rest of this article, is your number one priority.

Assessing an acquisition target in this area can, unfortunately, be tricky. 

“You will need to hunt around for this information,” says Lyon. “You need to ask if PAYE and VAT is up to date. Look through the books. Make enquiries with their accountant or their financial director.”

Holohan adds that you should ask to see tax planning information, review debtors for risk and perform a covenant review and analyse bank guarantees. 

But even then, the information you require may be hidden – sometimes on purpose. If this is so, then you will need some professional help to uncover it. 

People

“Non-financial indicators of a failing company include the best staff leaving, poor communication between sales and production, absent management information and sometimes just a bad atmosphere,” says Peacock. Essentially, the people employed at a company and how they interact are very good indicators of how healthy the business really is. 

“After cash, people are the most important sign of whether a company is healthy or not,” says Lyon. “You have to have people in a business who have a desire to push in the direction you want the company to go. Equally you need a management with a commitment to at least try things. You cannot wait for someone else to make a decision, because nothing will ever happen.”

Peacock explains that it is useful to see how a turnaround managing director works as an example of the close attention a business needs in order to thrive..

“Turnaround MDs are good at getting the senior team to start functioning and communicating,” he explains. “There is a lot to be learned from seeing how a ‘war room’ system works. In a turnaround company a room is often set up with white boards for daily KPI and situation reports for finance, sales, purchasing, production, despatch etc. KPIs are strongly cash oriented. The senior team meet and within one hour review each board in turn before splitting up to execute the agreed tasks.”

The make-up of the team is also important: if your company or a target company relies too heavily on one member of staff, that spells trouble. Likewise, a failure of succession planning for key roles also presents a risk. Despite becoming increasingly automated, print is still heavily reliant on people power so you need to know who does what and how well, the terms each employee is on and whether there is anyone to step into each role. 

Lyon adds that the mix of the team is also crucial: you need the right blend of youth and experience, he argues. 

“You need to look for young blood, but that is all too rare these days,” he explains. “If a business is too reliant on staff that have been around too long, you risk those individuals being set in their ways and being resistant to change. What they tend to give you is incredibly reliable, high-standard work, though. Those new to the business tend to be more motivated to try things, to add spice and fire, to fuel new things happening. For your business or one you are targeting, you need a mix of both.”

While not a comprehensive list, the above is a good starting point to run health check on your business. Holohan has some final words of advice about how crucial it is that printers do this: “All owners of printing businesses should be aware of the issues which could seriously ‘damage their health’. The financial aspects of a business are usually the ones which can ‘kill’ you.” 

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