UK: PLEASING FINANCE PROVIDERS.

UK: PLEASING FINANCE PROVIDERS. - In the middle of last month a slim booklet, some 40 pages long and bearing the imprint of the Department of Trade and Industry, dropped on to the desks of 22,000 top managers in manufacturing - 22,000 being the approxima

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Last Updated: 31 Aug 2010

In the middle of last month a slim booklet, some 40 pages long and bearing the imprint of the Department of Trade and Industry, dropped on to the desks of 22,000 top managers in manufacturing - 22,000 being the approximate number of manufacturing companies in Britain employing between 10 and 200 people. Called Money & Machines, the document contains guidance on how to assess opportunities for capital investment, an introduction to all the usual sources of funds (retained earnings, bank lending, lease finance and so on), advice on how to make a case to providers of finance and put together a financial package - and on how to manage the ensuing project.

So what else is new? The cupboards (if not the wastepaper bins) are full of quick guides to alternative methods of financing. These are put out - with the incessant regularity of junk mail - by the banks themselves, by accounting firms, venture capitalists and others. The difference, this time, is that the source is disinterested; also that the material has been assembled in response to the needs of businessmen, who have for years been trying to persuade the banks (and the Government) that a manufacturing company's investment in capital equipment should not to be equated with, for example, domestic borrowing. It's significant that Money & Machines is addressed both to companies and to financial institutions.

If the booklet assumes no very high level of financial sophistication, the authors make few apologies. Many companies - including some of the UK's biggest - still rely heavily on simplistic methods of evaluation, such as payback. But the book also explains more advanced techniques, like how to calculate the internal rate of return. In any case, explains Dr Ian Peters, deputy director of the Confederation of British Industry's Smaller Firms Council (who represented the CBI on the steering group which the DTI put together to oversee publication), the guide is at least partially intended for senior managers who are not financially expert, but who nevertheless need to understand principles and concepts.

Under present conditions many businesses quite reasonably prefer to finance capital expenditures out of retained earnings. If not, then they will probably resort to short-term bank borrowings or to leasing. But none of these solutions is right in all circumstances. (Peters argues that British business is overly dependent upon short-term debt.) Even an insistence on self-financing may be storing up trouble for the future, by starving a firm's working capital needs, points out Stephen Saltaire, investment director of 3i (also a member of the steering group). Besides, 'people get used to employing particular solutions.'

The wise course is to consider the whole range and pick the most appropriate - which may well be a package of different solutions - and then to draw up an effective, fully documented case for the banks or other backers. 'The single most common complaint that financial providers make is that so many submissions they receive are well below standard,' write the authors. Inadequate and ill-thought-out presentation is thus the biggest problem of all those that the booklet sets out to crack. 'If managers in businesses search for finance in the way suggested by the guide,' says Peters, 'they should encounter greater understanding on the part of managers in the banks.'.

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