RT Tanner & Co Ltd

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Contents
Conclusions
Management
Operations
Accounting Systems
Review of Balance Sheet
Trading Performance
Appendix

Bank Report

8 Future Prospects
8.1 Introduction
In this section, we consider the Company’s future prospects. Formal trading and cashflow projections for the year ending 31 March 1992 have not yet been prepared. PT has prepared draft trading forecasts on the basis of various future scenarios, namely the closure of the Dartford warehouse and cost cutting exercises. These were prepared purely for illustrative purposes and have not been reviewed/discussed by the board. The immediate closure of the warehouse, bringing stock back to Crayford, is not, in our opinion, a viable alternative due to the volume of stock held. As a result we consider that it is not worthwhile reviewing the draft forecasts in any detail.

What is apparent is that without immediate action the Company will continue to make large losses. In our opinion, turnover can, at best, be expected to remain at 1990/91 levels, margins are likely to be squeezed further and overheads will continue to increase.

It is our view that external assistance may be required to assist the board in appraising the various alternative strategies and in formulating a long term plan. We consider that this process must be commenced as soon as possible. We suggest that the end result should be a five year plan setting out the strategies to be followed in all key areas, sales and marketing, production, capital investment and finance. The plan should also set out the financial impact of the strategies to be adopted particularly determining the level and timing of the investment required. The long term plan must then be translated into a detailed twelve month trading and cashflow budget. Thereafter, it should provide a more effective management tool giving the directors and the Bank/Investors a better indication of the success or otherwise of the chosen strategy. We suggest that the forecasts are revised at least quarterly and rolled forward for a further three months. When the five year plan and twelve month forecast has been completed a clearer indication of the Company’s financial requirements may be given.

8.2 Options available to Management
We summarise below our understanding of the issues which we believe the Company’s management might usefully consider. These observations are only intended as suggestions for consideration and should not be regarded as conclusive or exhaustive. We strongly suggest that the Company’s management should take appropriate professional advise before considering their future plans for the business.

a) Sales
The Company should, as a priority, decide what market it wishes to be in. Being unable to compete on cost terms in the standard vanilla envelope market, the future would appear to be as a major player in the specialist customised envelope market. Once reliable information on sales/costs is available from the new system, management should review and rationalise its product lines so as to concentrate on higher volume and better margin lines wherever possible. Against this, the Company must consider what product the market and, in particular, its valued customers actually want. It may be necessary to carry low margin lines in order to retain customers who wish to deal with one supplier only. In this case the Company must consider whether it is more efficient to manufacture internally or to source these products externally as required. In considering these factors it may be necessary to undertake some marketing research.

Once the sales strategy has been formulated, the structure and operation of the sales department may need to be reviewed and changes made as appropriate. The sales effort needs to be more sharply focused on what the Company wishes to sell and what the market wants. Personnel changes may be necessary and commission structures may require amendment, in order to focus on margin/value added/cash receipts rather than on turnover levels per se. New sales techniques, such as telesales, which we believe may be well suited to this type of operation, should also be considered.

The Company has, until recently, only served the UK market. Two overseas customers have recently been obtained who have contributed significantly to sales. Europe would appear to offer a very large potential market. Any meaningful intention to enter this market will almost certainly require investment in both marketing and, possibly, the recruitment of an experienced salesman with knowledge of Europe.

Finally we believe that the current marketing spend may be insufficient. Whatever future direction the Company decides upon will require proper marketing. Tanner is a well respected name in the industry and this goodwill must be reinforced positively.

b) Production
Efficient production is hampered by the presence of several aged slow machines. For the Company to compete in the future, significant capital investment in new high technology machines may be required. This investment should be viewed as an ongoing process with new machines continually being acquired. The specialist envelope market will, in our opinion, continue to become more competitive and at no time can the Company stand still and become complacent. The Company must be able to respond to the market, where trends and fashions change, by acquiring machines to undertake new processes thus giving Tanner a competitive advantage.

We suggest that consideration is given to disposing of older, under utilised machines in order to provide additional space and reduce the prohibitive maintenance costs of running these machines. The production function is labour intensive with many operatives employed. Investment should help reduce the workforce size leading to cost savings. For the changes required to be successful the support of the workforce will be required and management must carefully plan and handle staff reduction so as not to alienate the workforce and ignite the union involvement. Full capital appraisal should, however, be undertaken for any investment in new machinery.

c) Finance
We suggest that, for the Company to survive and ultimately prosper, significant investment will be required both immediately and on an ongoing basis. Further investment will, hopefully, be funded out of future trading profits. The immediate concern is, therefore, the source of funds for the investment that is now required. The more obvious sources of finance could include:

i)Raising long term funds (25 year mortgage) secured on Crayford property
ii)Equity injection either from the Tanner family or external venture capitalists
iii)A management buy out linked with a capital injection for realisation of the Company’s existing assets by way of sale of the Crayford and Herne Bay properties with a relocation of both Crayford and Dartford operations at new rented premises which would permit all operations under one roof.

d)Short term measures
Implementation of whatever strategy is finally decided upon will clearly take time and in the short term we recommend that the following actions are considered:
i) As a priority, the problems with the computer system must be resolved. Until this occurs accurate information required by management for decision making will not be available
ii) Stock levels should be reduced wherever possible and surplus, slow moving lines disposed of
iii) A thorough review of overheads should be carried out to try and seek significant savings
iv) Tougher credit control procedures should be implemented with an obective of reducing debtor days to, say, 50 days, so as to provide additional working capital. Alternatively if such an improvement is not considered possible the Company may wish to consider the possibility of debt factoring

8.3 Cashflow
The cashflow forecast for the next twelve months has not yet been prepared. In order to determine the facilities required in the short term from the Bank, management has prepared a five month forecast at our request which is attached at Appendix K. A brief review indicates that this has been compiled on a reasonable basis and that it incorporates non trading items such as the repayment of the Bank loans. The forecast cashflow is as follows:

Ł'000	Bank Balance	Monthly movement
31 March 1991	(410)	-
30 April 1991	(440)	(30)
31 May 1991	(523)	(92)
30 June 1991	(520)	12
30 July 1991	(603)	(83)
31 August 1991	(565)	38

The large outflows in May and July arise from electricity/rent quarterly VAT payments respectively. Overall the Company is forecasting its requirement to increase by Ł163,000 from the 30 April position to a peak of Ł603,000 at 31 July. The forecasts do not take into account any potential receipts from the sale of Tanner’s interest in Krolle or legal claims, the timing of both being uncertain.