In spite of the claims of successive governments that they oversee ‘digital economies’, the majority of commerce in the UK is still asset-intensive.
This includes primary sectors such as mining, extraction or farming, manufacturing businesses or service sectors businesses with a physical location, such as high street retailers and entertainment offering such as cinemas and bowling alleys.
Many asset-intensive businesses have entered a period of financial distress following enforced shutdowns during the pandemic and muted consumer demand following it. Falls in revenue have led to sustained months of losses or negative cash flow.
In this article, we’ll look at some at two savvy ways that businesses and disputes specialists are managing their assets to survive the next period.
Disposing of ‘zombie assets’
‘Zombie assets’ are a new concept loosely linked to the definition of a zombie business. A zombie business is one with such a debt burden that its profits can barely afford to provide a fair return to debtholders. In other words, they pay out most or all of their profits as interest on external loans, leaving nothing for capital investment or shareholder returns.
A zombie asset is an individual item on your fixed asset register that fails to pay its way. The incremental revenue attracted by the asset fails to pay for the depreciation and or maintenance of the asset.
Assets can fall into ‘zombie’ status in a number of ways:
- Over-investment into a new product or service line which underperformed against expectations
- Changes in customer trends have left assets underutilised
- Where the maintenance costs of older assets begin to increase exponentially with age
A great financial manager will be able to readily identify zombie assets and assess the risk/reward of disposing of these financial shackles.
Secure debts on real business assets to reduce interest payments
Restructuring existing business debts can be an easy way to instantly improve the financial situation of a firm.
Businesses will usually take on an array of debts with different providers, different terms & conditions, and different interest rates. While a firm cannot immediately improve its credit rating, it can reduce the risk to the lender by offering assets as collateral to the bank or financier.
A common strategy to reduce the overall interest expense of a company is to restructure unsecured debts into a single, larger facility that is secured on the assets of the business.
The most common assets for debentures are the land & buildings, property plant and equipment of the business. However other options are available such as securing loans against the value of outstanding debtors invoices.
Invoice factoring companies take over the cash collection process and advance a % of the value of sales invoices to the company. Such services tend to be expensive but can be a lifeline compared to wholly unsecured options such as corporate overdrafts when a business is in financial difficulty.
Other financing strategies employed by businesses include:
- Taking full advantage of tax relief provided by HMRC on capital expenditure and investment in R&D.
- Stretching working capital further by extending payment terms with suppliers and demanding faster payment by customers (within the limits of the prompt payment code)
- Offering discounts to clear inventory surplus and release some of the cash tied up in old or obsolete stock.
Every business is different, and as such not every option is available to businesses. A business adviser will assist you in setting out different restructuring options to assist you in turning around your company’s finances.