Every turnaround process lives and breathes on cash flow!

Quickly pulling “cash levers” may well be essential to survival especially when trading is marginal or loss making.

Cash levers:

“Buy time” until there is a turnaround in operations or another long term solution.
Don’t solve underlying profitability issues.
Normally involve working with the existing financial stakeholders and balance sheet position as it can be very difficult to find new investors and financiers at short notice.

Here are 10 cash levers quickly able to be actioned to help a company “bridge” until a turnaround is able to be effected.

1. Capital raising: This is a good way to retire debt and “take the heat” out of the debt position while it is most relevant for large private and listed corporations. There are pro and cons, a major downside is dilution which represents equity you are unlikely to ever get back.
2. Convertible debt: A key advantage of this is delaying dilution while options in relation to the terms offered include “sweetening the pot” through discounts and having a “valuation cap” for debt to equity conversion based on a maximum company valuation.

Current financiers
3. New bank facilities: Extending or changing bank facilities with existing financiers can be relatively straightforward because of the financiers existing knowledge of the business and exposure. However, the “price” of new facilities is often having to provide additional security, agreeing to increased rates or allowing more onerous covenants.
4. Principal repayment deferrals (interest only facilities): Current banking practices make this more achievable as financiers are increasingly supportive and keen to avoid businesses failing.
5. Shareholders loans: This is an easier option assuming you have investors with deep pockets! Third party financiers will often require any shareholder loans to “wait in line” ie subordinated.

Working capital
6. Invoice factoring and discounting: Expensive money but the effect on cash flow can be dramatic, especially in businesses with extended working capital cycles. These facilities are much more common and accepted in the market than was the case historically.
7. Supplier/creditor repayment arrangements: Suppliers are generally willing to be supportive when a business is going through a difficult period but management need to build trust and provide some certainty and visibility in relation to how/when amounts due will be paid down.
8. Deferral arrangement for tax liabilities: An approach similar to that for suppliers works well but bear in mind statutory authorities are process and regulation driven and therefore charging interest/penalties is often non negotiable while if repayment arrangements are agreed and then breached this may trigger immediate demand and recovery actions.
9. Reduce inventory: In the short term achieved through targeting old, slow moving stock and also reducing product lines. The hardest part of reducing inventory can be emotional ie not wanting to sell at a loss or low margin. However, immediate cash is a lot more useful than future profits.
10. Accelerate debtor collections: There are short and long term solutions to debtor reductions. As an example, short term solutions involve strengthening collection systems. However, it takes longer to improve billing accuracy and therefore reduce collection disputes.

This list provides some “quick wins” that help a business get some of the “low hanging fruit” to improve cash flow while it is best to consider and pursue all possible cash levers as there is uncertainty as to what is actually achievable from any of these options.

If you would like a no obligation, confidential discussion about turnaround management and executive solutions, please contact me at svertullo@integralfinancial.net.au.