Friday, 15 May 2020
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When working in a distressed company, time and cash are the most important and scarce commodities. 

If both of these were in plentiful supply there is no doubt that most companies would eventually manage to solve their problems – be it at a price – or they simply would not have a problem to solve.

But given we live in the real world and do not have access to either a money tree or a time machine, time and cash are major constraints when turning around distressed businesses.

A common mistake is to accept cash and time as fixed variables in a turnaround – then embark on a balance sheet and/or operational restructure within the confines of these. For example, “we only have $X and four weeks to decide on whether we sell, save, or close down a division or facility”.

This is one dimensional and can severely limit the number of strategic options available to fix a business. A far better approach is to acknowledge these constraints but also pursue tactics which will increase cash and therefore time.


After all, having eight weeks rather than four to fix a more significant problem or negotiate with a financier (or multiple financiers) is exponentially better.
So, when we are faced with time and cash constraints, how should we go about ‘increasing the options’? The answer is cash flow.

Get in the zone

First step is to ‘get in the zone’... do not think of this as permanently fixing the business (you need to do that too but that comes later).

This is about acquiring time to both fix the business and/or negotiate a balance sheet structure so the business has a sustainable future.

Do not focus solely on large profit and loss items. Just because something is a small percentage of revenue, does not mean it is not important if you can use it to ‘buy’ another two months trading.

Whilst materiality is important, so is variability. For example, you may be able to change a small item by a large amount, e.g. discretionary spend. Conversely you may not be able to change a large item at all, e.g. equipment leasing or rent.

Accounting practices may lead to poor decisions in a cash-strapped environment. The profit and loss statement aligns costs with revenue, but in cash terms they may occur at different times. For example, depreciation vs capex; and COGS vs purchases.

Also, an over reliance on the profit and loss statement may lead you to ignore opportunities to release cash from the balance sheet. For example, selling existing inventory at a loss negatively affects EBITDA but may gain you valuable time.

Build a team and establish control

Cash flow difficulties are not something to broadcast to everyone. However, it is also not something to keep only to yourself.

Most cash management improvements are the result of work from multiple people within the organisation – mostly from outside the finance department and Boardroom.

The key is to select your team carefully, and bring them ‘inside the tent’ so they understand the real issues and can be part of the outcome. These people can be varied, but may include operations and purchasing, maintenance and sales and accounts (payable and receivable).

Trust and attitude are everything. They must be reliable, pro-active and agile.

At this early stage, although you may not yet have a working cash flow model, you can implement initial cash control techniques. For example:

  • assess purchasing authority levels (buy less, lower working capital)
  • consolidate bank accounts (easier to manage)
  • ensure collections staff are adequately resourced (do not strip resources from here!)
  • delay non-essential capex
  • approve payments on a weekly basis (easier to manage and prioritise)
  • communicate the position to all people who can incur expense (stop or delay discretionary spend).

I see therefore I can manage

A business in cash flow difficulty becomes impossible to manage if it does not have timely and accurate cash visibility.

In practice, this involves building a direct cash flow model, i.e. from direct inputs, as opposed to profit and loss and balance sheet inputs.

A financier should never invest into a cash strapped business that does not have a working short term cash flow forecast.

The model should be ‘fit for purpose’ and there are a number of nuances which make this a different exercise than building a normal financial model.

Once the model is built and key people involved, a business should then have enough information to answer three key questions:


Remember, build the model as status quo only – do not bank on an improvement if it has not yet been actioned.

Now you have the team in place, have identified the magnitude and timing of your challenges, and have a tool and process to manage it, it is time to get moving. No-one ever solved a problem by building a cute model – it is what you do with it that matters.


Use the playbook and explore all the options

When it comes to tactics to increase cash and working capital, it is unlikely you will have an ‘aha!’ moment, hence do not run a two-day strategy off-site to generate a big idea. This discipline is more like eating crab – you will fight hard and come out covered in blood… but hopefully find enough meat to sustain you.

There are three primary strategies to generate cash from a business and hence, extend the time you have to fix balance sheet and/or operations:

  1. Miss the dips – What are the timing anomalies which may trip you up?
  2. Move the line up – What are the ‘one time’ opportunities to raise cash?
  3. Trend the line up – What initiatives can have a short term, but ongoing, impact on cash levels and long term profitability?

Miss the dips

A cash dip will generally be a timing anomaly where major receipts and payments do not correlate. You have two choices here – move the receipts (collect early… possibly through discounting), or delay the payments.
The key thing with cash dips is to spot them early, because they generally require collaboration with another party to avoid them, e.g. early debtor collections; delayed creditor payments; ATO payments etc.

There are three key things to remember:

  • Your allies are those whose interests are aligned with you.
  • ​Think creatively and leverage your importance (not size).
  • If you establish a plan with an external party, make sure you honour the plan because you may need them next month.
Forego profit to make key payments

A large creditor payment was due Monday morning every week. On Friday, and over the weekend if necessary, the company would pull every possible order through the plant, including scrap inventory, and invoice it. Due to the debtor financing facility, cash would be in the bank Monday morning and the company would meet key creditor payments. Overtime labour was incurred, and hence this did not increase profit, but it was giving them the cash they needed at a critical moment.

 Move the line up

Raising the cash line is primarily about converting working capital into cash, hopefully on a permanent basis. The common working capital levers include selling slow moving/obsolete (‘SLOB’) inventory, settling debtor disputes and selling surplus capital equipment.

Of course there will be other opportunities in the business, for example, purchasing. Are your purchasing people holding six months of raw materials because they get a 5% discount and they are measured on that? If so, stop buying (buy for cash), lower stock holdings and change their KPIs.

Look behind the shed

It often pays to search behind the warehouse or at other sites for valuable inventory that is no longer required. You will often find surplus equipment or inventory which you ‘may need for future growth strategy’. If you need to move the graph up then move the inventory on, and re-invest later when balance sheet and cash is more stable…or when you actually need it.


Trend the line up

Trending the line up is related to improvements that ultimately lead to profit improvement. The difference between this and more traditional improvement initiatives is the need to be delivered quickly with minimal cash outlay. Hence redundancies or exiting premises with lease payouts may not be a short term option.
Improvement areas can be broadly categorised into three sections:

  1. Operational: Overtime or contract labour reductions; quick efficiency gains (methods to do more with less); roster changes (scale down weekend or night shift); indirect spend reductions.
  2. Strategic options: Are you currently operating in loss making channels, customers, products or locations (be sure to analyse incremental cash margin, not accounting margin, otherwise you may exit and lose more cash).
  3. Revenue: Pricing is often neglected, but is also specific to industries and hence difficult to generalise. However, search for quick wins as these are high impact and have 100% ‘pass through’ to profitability. For example, in a low unit price environment, you may be able to cut out a price band of (say) $7.95 and reprice at (say) $9.95.

Measure to improve

‘Quick’ productivity gains are often a result of simply measuring output and leveraging existing know-how inside an organisation. For example, a welding business improved productivity 40% by using one piece of chalk – drawing the line on the steel and setting achievable targets.

Toward stabilisation

The focus of this paper is on buying time, rather than providing long term strategic benefit.

However, there are applications in all businesses:

  • If you are in a strong cash position, what disciplines could be embedded in the business to further improve return on capital, and drive greater cash flow disciplines? This may help you allocate capital in order to pursue other growth opportunities.
  • If you have a poorly performing business unit or portfolio company, embedding cash disciplines, especially in ‘trending the line up’, can create positive momentum and underpin a culture of improvement.
  • If you are in a cash crisis, then this is an approach to help navigate the obstacles in front of you. While it is not a linear process, you still need to follow the steps of visibility, then control, then improvement.
  •  If you do not know your cash position, find out now!
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