Think BR: Hope springs eternal, but cash doesn't

It’s a sad state of affairs when our very own chancellor of the exchequer produces a cash flow forecast that can only achieve his previous target for the current year by introducing a new source of income the certainty of which cannot yet be relied upon.

I refer of course to the estimated £3.5 billion he expects to collect by auctioning off the 4G spectrum of airwaves that will speed up mobile phone internet connectivity.

In the commercial world any bank manager worth his salt would take any such forecast with a heavy pinch of salt. Not that anyone doubts that revenue will be derived from the auction, it’s just that it hasn’t happened yet and no-one knows how much income it will generate.

It’s a bit like an agency that produces two cash forecasts - one including only known or readily predictable sources of income and likely expenditures and the other including an additional amount of unknown new business to arrive at the outcome necessary to satisfy the bank manager.

So we should welcome the fact that most of Britain’s privately-owned marketing agencies seem to have been taking the opposite course of action to that practised by George Osborne. 

According to this year’s "Private Plums" report, 78% of those agencies had either eliminated any borrowings or had contained the level to no more than one-third of the funds provided by shareholders.  Another reassuring sign was the growth in the proportion of agencies whose balance sheets included readily realisable assets sufficient to cover at least three months’ operating costs.

Of course neither of these measures guarantees survival, but they increase the probability of doing so.

The Private Plums report also provides some graphic examples of what can happen if borrowings cannot be reduced. Look at the late and unlamented Involve Marketing Partnership that kept spending cash on buying other companies when it did not have a substantial base of long-term capital to start with. Or look at Rapier where a strong financial base was stripped out to meet the owner’s personal needs. Or Brilliant Media Group where an earlier management buyout had been funded from short-term borrowings that could not be repaid quickly enough out of earnings.

Each of these agencies would have been thrilled to be able to anticipate a bonus cash injection such as the Chancellor is relying upon, but each to their cost also knows what happens if those hopes are not fulfilled.

Bob Willott is editor of Marketing Services Financial Intelligence