The Expert's Advice

Facts are friendly, but need care. It is a time for honesty and presenting things with care, to ensure a balanced view is taken

Paul RaleighOne of the first priorities for the company should be to get an accurate picture of its financial position. This will have to be done in conjunction with the company's bankers. Banks hate surprises but, if they believe that management has also lost control, they will quickly act to protect their own position. It is crucial that management is seen to quickly identify the problems and take decisive action.

The company should call an early meeting with the bank to explain the situation and outline their plan to cover the next four to eight weeks.

At this stage, there is little point in looking at the future beyond the immediate diagnosis and prognosis stage. The company should suggest that they engage an independent firm of accountants to assess the extent of the problem and who would report directly to the bank.

It's a time for honesty and presenting the facts as they are with care to ensure that a balanced view is taken of the company's position.

One major issue for the bank will be the possible involvement of senior management in misstating the accounts. Joe is new to the position so he will be seen to be faultless but only time will tell if there are questions over the integrity and honesty of management. There may be serious legal implications for individuals who may have been involved in misstating the company's accounts and records.

Cash Flow Management: The company's reporting and management focus needs to shift to cash management. The immediate priority is to ensure that the company has sufficient cash to survive during the rescue period. Strong reporting is one of the keys to survival and daily and weekly cash reports should be put in place. The bank, who are unlikely to provide any further facilities, will expect weekly cash flows covering, initially, the rescue period.

The company will need to adopt cash management measures which include:

* As with the bank, the company should identify and assess its financial position with its critical suppliers. The company will need to maintain its supply lines which may involve advising key suppliers of its current position and trusting them to work with the company through the rescue period. The company will need to schedule out its creditor payments over the next few weeks to calculate its minimum cash outflows on a weekly basis.

* Stock levels should be brought down to a minimum with any surplus stocks being returned or sold to third parties where possible.

* The debtors' ledger will have to be examined in detail in order to calculate the exact position for each account. Remember that 80 per cent of business usually comes from 20 per cent of the accounts, so focus on the big ones first. We know that Medibeo's biggest customer accounts for 25 per cent of the company's sales and is contracted to supply the NHS with product. It may be possible to release some extra cash from this customer. It appears that it will be necessary to meet customers to ascertain the extent of sales made on a trial or sale-or-return basis. This detailed assessment will allow the company to schedule out its receipts for the rescue period. The company might consider offering product discounts or cash discounts to speed up sales and collections.

* There are three R&D projects at an early stage so it is likely that these can be stopped, which should allow for overhead and, perhaps, some savings in employment costs.

* Time is so important in these cases and all cost savings give the company a better chance to put its finances in order and take the steps necessary to ensure survival, even if that means as a slimmed down version of the original.

Paul Raleigh is a managing partner at Grant Thornton

Speed is a priority before banks arrive

Louise Simpson:The fact that Joe was flattered when approached to join MediBeo and excited by the opportunity to become part of this team is unsurprising. Management buy outs (MBOs) can be some of the most rewarding and dynamic enterprises in the business world. Sadly, they can also be the ones with an Achilles' heel that enthusiasm and unique selling points cannot overcome. In this case, MediBeo would benefit from taking some time out from their busy enterprise to analyse their current position.

The company has benefited from the undoubted enthusiasm and vision of the board. They have a loyal workforce (as MBO's often have during their early period) and a skill set that comprises sales abilities and technical engineering strengths. In addition to this they possess a competitive product and some loyal blue chip clients.

Counteracting this, the organisation must also recognise that there are weaknesses in their management skill base - both at board and line management level. Some development or mentoring might assist the relatively immature board to acknowledge the fundamental importance of sound financial controls and reporting to enable sustainable planning.

The line managers appear not to be dealing effectively with issues (both the production manager and the previous accountant have avoided issues which resulted in an inability to fulfil their roles.) The fact that the board appear to be unaware of (or uninterested in) these vital issues suggests that full reporting from departments to board is inadequate. These inaccuracies produce an increasingly frightening sense of a board operating in the dark with their eyes firmly closed.

The very real threats which should be addressed as a matter of extreme urgency include the possible withdrawal of suppliers which could effectively halt production and increase costs in an already very tight profit margin environment.

The competition from Asia is an all too familiar threat to western manufacturing and any further curtailment of profit margin could be terminal.

The fact that this stark reality is not recognised is a risk in itself - the financial misinformation which has been provided does not allow management to analyse or plan effectively.

The failing financial processes have to be addressed to enable a realistic strategic plan to be formulated.

Basic financial controls to ensure accurate information are essential. Matters such as customer payment terms not being adhered to and the inaccuracies of costings will lead to almost inevitable business failure in such a competitive environment. Payment of suppliers should be efficient in cash control terms while maintaining the mutuality of the relationship between MediBeo and the providers of their raw materials.

A robust audit in place of the current compliant and ineffective process should be welcomed rather than feared.

The euphemistic "estimates" referred to by Joe's predecessors should be confronted - possibly with resulting internal disciplinary investigation against any staff prepared to jeopardise the organisation in this way.

Louise Simpson is a lecturer in the University of Ulster School of business, organistation and management