Strategic Finance
AIM market: financial management crucial |
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| Written by Paul Strzelecki, Managing Director of Yorkville Advisors UK | |
| Wednesday, 17 December 2008 | |
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Page 1 of 2 AIM listed companies are facing a tough 2009 but they can survive the downturn and go on to thrive.
According to some commentators, we’ll all be lucky to survive 2009 as the world’s economy follows the banking system over the edge of a cliff. Next year begins with an unprecedented situation: up to 20 of the OECD nations will be in recession.It’s too soon to know what the precise effect on AIM will be. It is fair to say more companies will de-list, while others may be able to drive their stock price up more independently and flourish. Some businesses will fail, while others will decide the cost of being on AIM is too high and the support they receive and lack of capital access is not worth the money. Regulation may also play a part if one of AIM’s principle attractions, the ‘light touch’ regime of compliance, should change – which it already has begun to do. If regulators succeed in adding more layers of complexity to the existing rules, many companies may well decide that the benefits of an AIM listing simply are not there any more. These companies will vote with their feet. However, while the headlines have been largely about financial meltdown, it is not necessarily true that all businesses are powerless to resist the downturn. Those companies that can identify changing trends and follow a few simple rules can survive – and even thrive. There will be a future but part of it is what they make of it. COMPANIES WITH CLOSE CASH MANAGEMENT WILL BE SURVIVORS How times have changed, The Economist recently argued that cash rich companies were valued higher than those with little in the cupboard and AIM-listed companies are no exception. A lot of companies mismanage the cash the have got, which might not be serious in more prosperous times, but could be a death sentence in a downturn. Their operations and cash flow will be examined with greater focus than ever before, so the clever ones will be mindful of costs and manage their cash tighter than they have in the past. They might even want to put someone in charge of cash alongside the Financial Director. Most companies should be looking at taking 20% out of their cost base, and not just from headcount. Savvy firms will look at their supply chain and adopt the 20% rule that demands 20% off last year’s price. Times are hard, so businesses will need to get close to their supply chain in order to secure better terms in the long run and negotiate hard. Once they’ve done that, clever businesses will be looking to their most profitable markets and good paying customers to generate as much cash as they can. ALTERNATIVE FINANCE WILL FLOURISH It remains to be seen whether the Government’s badgering of the banks will have any real impact. But it’s fair to say that the equity markets are pretty much off limits to all but the luckiest companies, while debt is either too expensive or simply not available. This means businesses will have to use as many innovative forms of finance as they can to maximise their cash. For many this will include well-established forms such as factoring or invoice discounting. Financiers – other than banks – will develop alternatives to traditional means of finance and many new products will be launched in the coming months. Companies should be all too eager to consider these. AIM companies must educate themselves on alternative finance options as too many are blind to the possibilities. Clever management will be able to identify those products that will benefit the business and spot the snake oil. One clear winner will be equity distribution facilities that create not only the opportunity but also the least dilutive effect in tranche equity capital raising. In a tightening market, cash rich companies will have the upper hand as they learn to use their liquidity as an asset to be better equipped to secure finance from a range of sources. THOSE FIT AND THE FOCUSED AT THE TOP WILL BUCK THE TREND Many companies have little or no experience of recession and should question whether they have the right skills within the business to survive. We will see companies managing and leading in a different way – understanding that leadership means doing more right things and management means doing those things right. Those that buck the downward trend will be the businesses that understand their company’s culture probably has to shift. In good times, the urge among many businesses is to diversify. However, companies that have diversified may be among the first casualties. As the downturn hits and margins are squeezed, diversification can rarely be justified. |
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