The Experts Advice

TOM MURPHY'S relationships with clients are suffering because of poor technical back-up on repairs and maintenance and his bottom line is stretched because of poor credit terms from HSS Technik.

He is being squeezed from both sides and the business is at risk of spiralling out of control, particularly if he has to resort to using expensive credit facilities.

Murphy needs to react quickly if he is to continue in business and thrive. He has put everything on the line, from quitting his job to accepting an interest-free loan from his father-in-law, so despite the sleepless nights and headaches, it's too late to go back now.

Many companies which go out of business do so, not because they are unprofitable, but because they have cash-flow problems. In these difficult economic times, "cash is king" and businesses must keep an eye on debt levels or else they will perish.

On the issue of VAT, there is something Murphy can do. The consignment has arrived ahead of schedule, but under the postponed accounting method, the supply can be zero-rated in Germany (as an EU intra-Community supply) and Murphy must account for VAT on the 15th day of the month following. As a person with full VAT deductibility, Murphy can deduct the VAT payable on the acquisition in the same VAT period, thus cancelling out the VAT liability.

Murphy must then charge VAT when he makes a supply to the customer. Is Murphy eligible for the cash-receipts basis of accounting for VAT? Either 90 per cent of his turnover must consist of the supply of goods to unregistered persons (unlikely) or annual turnover must be unlikely to exceed €635,000. If not, Murphy must account for VAT on an invoice basis and must issue an invoice within 15 days of the end of the month in which the supplies are made. Anything Murphy can do to make supplies in the second month of the VAT-able periods (ie, February, April, June, August, October and December) will push out the date on which he has to account for VAT.

Murphy also needs to meet with the older son in Germany to explain the problems he is experiencing. Before travelling, he should review the terms of his exclusive distribution agreement to determine whether there is any scope for unilateral amendments to the terms by HSS Technik, or whether all changes must be mutually agreed. Murphy should go armed with sales statistics showing his extensive network of customers and express an interest in the UK and Northern Ireland distribution rights, if agreement can be met on terms for the next three years. The UK is a bigger market and it will take longer than just six months to build a distribution network. Can Murphy acquire an existing player to get there faster?

In his meeting, Murphy must prioritise three issues - delivery of spare parts, technical support and the quality of the customer warranty.

On the first issue, Murphy should point out that if the machines can be delivered promptly, so too can the spare parts. The tightening of credit terms is unfortunate, but not unexpected in the current climate. This is a bargaining chip he could concede, especially if he can pass on tighter terms to his customers.

Murphy has two back-up plans. Firstly, he can revisit the Belgian distributor and see whether he can take on Ireland and the UK. Secondly, Murphy can distribute the complimentary cleaning products. Will this further deplete cash flow? Are the margins there? What sort of scale could he achieve with them?

Murphy would be wise to do two or three different business plans to focus on cash flow in these different scenarios and use the final plan to approach the banks for funding if required. Whatever Murphy decides, he must be resolute in his decision and move fast. Despite his hopes, the dust may never settle.

- Abigail St John Kennedy

FIRSTLY, no business is worth having a heart attack over. Tom Murphy must look after his health first and then his business.

The business challenge facing Murphy is a familiar one and brings home the need for "what if" planning and being able to be flexible and agile in business forecasting. The second aspect of this scenario is the "rabbit in the headlights" reaction to a new and difficult situation, where the manager decides to sit tight, an excuse for "I don't know what to do". The third aspect is the need to create and manage strategic alliances, with the emphasis for Murphy on managing them after the deal is done or when there is a change in the dynamic.

Murphy may have found the late Herr Schneider exacting but fair, but now he must deal with the son who seems to have a different manner. However, he is still working under the negotiated contract and no matter how aggressive and confrontational the behaviour of the new team, the contract is the contract and Murphy can be just as strict with the German supplier as they are tending to be with him.

Murphy must acknowledge that the tacit agreement with the late father is no longer available and he should recast his stock deliveries, business projections and cashflow based on the letter of the contract rather than the tacit historical agreement. Having done that, he will be better able to adapt his own terms and conditions of trade with his own customers, in particular payment terms.

The fact that he has had to use expensive overdraft facilities is as a consequence of contracted stock deliveries and Murphy would be advised to investigate a stocking loan facility, which will work out cheaper for the business.

A new owner-manager in HSS means that Murphy must get to know him on a one-to-one basis and not be just another faceless distributor. He needs to get over to HSS immediately and discuss business plans and terms of trade, showing the potential for the Irish market and the plans for Northern Ireland and the UK.

If the existing contract does not preclude him from handling other cleaning products, then this could be investigated as an add-on complimentary or competitive opportunity.

The lesson to be learnt here is that one cannot assume that a business alliance is done and dusted when the deal is signed.

- Mark Fielding

BUSINESS IS a two way process, with a supplier only being as good as the quality of their product and the service they provide. On the other hand, the customer is only as good as the sales he provides and his adherence to contract and payment terms.

Good communication - and trust - in any business relationship, or indeed any relationship, is essential. Tom Murphy's relationship with HSS Technik is going through a bad patch, but was it ever a good relationship from the start? Murphy's initial research on HSS Technik showed that the company had a top quality cleaning product but was possibly not geared to export outside mainland Europe.

In addition, HSS Technik is a family company but it appears it was without a sound management structure, being over reliant on the late Herr Schneider.

When Murphy started having problems with the service from HSS Technik - he was not getting response to his e-mails and phone calls - he should have jumped on a plane and visited his German "partner" to discuss them.

Is Murphy is giving enough business to HSS Technik to keep them happy with the relationship. It may be that HSS Technik are experiencing difficulties in their own business and this is the reason that Murphy's dealings with them are no longer running smoothly.

Taking on a line of complementary cleaning products may be a hassle-free alternative but is it going to give him the turnover he needs to cover his existing overheads? Whatever he chooses to do, he needs to act swiftly.

- Mark and Rosie Shortt