COMPANY MANAGEMENT
APPROPRIATE ASSISTANCE Financial institutions including large banks can often benefit by bringing in appropriately experienced interim panel members. Several years ago, I was called upon by a hotel business to construct a medium term P&L, balance sheet and cashflow on behalf of the directors, so that their bank could take an objective view of a business which had been ‘flagged up’ as living dangerously close to its covenant constraints and funding limits.
The bank had asked its advisers for an opinion, but the advisers, having discovered that no robust forecast existed, had to stand back from actually producing the forecast – as they would subsequently need to perform a due diligence exercise upon that forecast, and obviously could not do both. The forecast needed to be independently produced by the directors, approved by the directors and the results of the exercise owned by the directors, before the bank’s advisers could meaningfully challenge the key assumptions built into the model.
So I was introduced, and we drew up a formal agreement between the hotel and my company outlining the scope of the work I would perform. The model was built using six years’ retrospective monthly numbers as a foundation. Following detailed conversations to hammer out reasonable and robust assumptions with the directors, I was able to generate firm forecasts of the forthcoming 18 months, supported by recent experience of being a full time Finance Director within the leisure industry.
KEY CONCLUSION
The key conclusion was that the fundamental business was sound, profitable and cash generative. However, the long term loan’s repayment structure, put in place at the point when the directors bought into the business, put too much liquidity pressure onto the business’s ability to generate EBITDA over the short to medium term. The perceived trading problem manifested by the bank’s internal ‘overdraft warning’ system was then fully understood. Assured by the conclusions of the advisers’ subsequent ‘due diligence’ exercise, the ongoing relationship between the bank and the directors returned to a normal state of health, focusing on trading issues and positive discussions over future capital spend that would enhance the forecast performance over the medium to long term.
THE VALUE OF VERSATILITY NEDs can also operate in the public sector – I have worked in this capacity on the Trust Board of an Acute Hospitals Trust. Company law dictates that all NEDs of a private sector business share the same legal responsibilities and obligations as the executive directors. Taking on those legal responsibilities as a layman operating within the medical field should not be taken lightly, but the value that one’s commercial experience can add to a Trust Board makes such a role an interesting and rewarding one to both parties.
UNDERSTANDING BUREACRACY Understanding the bureaucratic nature of the NHS is as intellectually challenging as it is time consuming. The monthly Board Pack was encyclopaedic. Certainly, holding Trust Board meetings in part in public session was a new experience for me. During my time as a NED I chaired Consultant Appointments Committees (having first taken the required HR training courses), sat on the Capital Project Board that had delegated powers to oversee the building of a new cardiac unit and a new oncology facility, and I learned a great deal about senior employee reward and retention issues as a member of the Remuneration Committee.
The professional challenge of helping a Trust Board achieve non-profit objectives should not be underestimated. When one’s organisation can be punished by having too large a financial surplus at year end as well as having a deficit, it does cause the grey cells to operate in a different way! In a Trust whose income is £1m daily, £365m pa, achieving a break- even position allows a tolerance of less than 0.3% of turnover.
THE BEST WAY FORWARD
Any board of directors wishing to appoint a NED can expect to gain from experience accumulated from other industries and sectors. They can also expect to be challenged. A creditable NED will walk away from a board that he or she believes is taking the wrong path, but by challenging from an ‘I’m on your side’ perspective, their overriding aim should always be to find the best way forward, to be constructive, and to be an invaluable ally.
There are very few business decisions that are so low in risk and cost, and yet which offer so much potential value, as the appointment of a credible, professional non-executive director. Their ability to move between companies and sectors, to constructively challenge the status quo, and their willingness to share their experience and ideas can fertilise business growth.
Jim Doyle
www.jadfms.co.uk Click to view more info
www.windenergynetwork.co.uk
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