CLOSE-UP: LIVE ISSUE - Time for production sector to focus on its financial affairs

Have high-profile closures shown financial failings in production?

Was the collapse of the production company Harry Nash an a-typical hiccup in an otherwise financially stable sector of the industry, or is it symptomatic of a wider malaise? And what can be deduced from the winding up of James Garrett & Partners with debts of more than £1 million owed to his own (mainly offshore) companies and banker Duncan Lawrie? Not surprisingly, Stephen Davies, the chief executive of the Advertising Producers Assocation, defends the overall quality of business management in the sector, but there are some dissenting voices.

The Harry Nash collapse was exceptional in the scale of its losses - £609,000 in 2001 followed by another £395,000 in 2002. By any standard, that smells of poor financial management, with short-term liabilities exceeding the combination of cash and other short-term assets by a monstrous £1.2 million at June 2002.

Julia Reed, Harry Nash's managing director, says: "I have only ever made investments when my accountants had advised me that the company was in a position to expand. We're investigating the accuracy of the reported loss in 2001."

The rest of the industry could never understand how their quotes could be so substantially undercut and still enable Harry Nash to make a profit. Now, observers say, they know the answer.

"Most big companies understand that they have to make enough money to pay their overheads and earn a reward for the risk they take, so I would be concerned if a big company offered to do a job for no profit," Davies says. "But a smaller company may make a legitimate business decision to do so."

Stark's joint managing director Stephen Gash says mark-ups as high as 35 per cent or even 40 per cent were achievable "in the old days", but nowadays it seems that half that amount would be regarded as very good.

"You have to be smart about the jobs you take," Bertie Miller, the managing director of Spectre, which is soon to merge with Stark under the Large Corp banner, explains. "Even a 20 per cent mark-up on a very small job may not be commercially worthwhile."

The merger of Stark with Spectre may imply that producers need bigger resources - whether financial or in directing talent. But Miller is sceptical about any widespread rush to merge. "It's difficult to find like-minded people, and most companies that are doing well like to keep things as they are. It's just that we wanted to do something bigger."

Certainly, there are some financial risks that are particularly prevalent among production companies and similar types of business. For example, they lack the comfort of retained clients buying their services all the year round. Every new production contract won is like the start of another new business. So you're only as good as your last commercial and it's wise to keep overheads down.

"They are at the mercy of what work comes their way," Mandy Merron of Willott Kingston Smith observes. She admits she has come across some "fairly informal" financial structures among some production companies.

Laura Gregory of Great Guns agrees that the absence of retained business is one of the features of the business that makes financial management very important. There are other reasons too. "You need sound financial back-up, especially now that so many shoots take place abroad. Contracts require payment seven days before shooting begins, but sometimes clearance takes up to ten days," she says. Out of a staff of eight, two at Great Guns work full-time on financial matters. But Davies thinks talk of financial shortcomings is exaggerated, arguing that the bigger players are well managed.

The second risk factor goes right to the heart of production - its greatest strength and yet a potentially lethal threat. The sector is entirely dependent on the directors. It is their talent, more than anyone's production ability, that wins business. So they can dictate their financial terms - often including a share of profits. Lose a fashionable director, or discover that a former star director is fading, and a small production company may soon feel the down-draught of an anxious bank manager's breath.

Without a stable full of proven directors on its books, any production company remains vulnerable to changes in fashion - hence Davies' confidence in the bigger producers. He likens the situation to the football industry.

The stars become increasingly powerful, commanding bigger and better rewards, but most of the clubs (Manchester United excepted) never seem to get much richer. In a similar way, the profits actually left to producers tend to be comparatively modest after the directors have taken their share.

As the cost pressures bear down on the industry from agencies and their clients, the production companies must sometimes feel like the piggy-in-the-middle. But Miller reckons the bigger companies can exercise some buying clout to the benefit of clients, for example in crew costs.

A cursory review of the most recent accounts of a number of production companies is relatively reassuring.

While profits and margins have declined, on average they had sufficient reserves to pay all their main operating costs for two or three months in the absence of any new income.

It's all too easy to strip out the profits when they're made, but few people are willing to lend them back in tough times. As Miller says: "Once reserves are built up you must guard them carefully."

Equally it is hard to feel secure without a reasonable portfolio of committed talent to offer to agencies, while always on the look-out for tomorrow's newcomer. But get the twin resources of talent and financial management right and production companies should continue to make a decent living.

As Reed says: "This whole experience has taught me that you need great directors and equally great accountants."

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