management
BUSINESS BUILDERS
Cash flow projections mean life or death for struggling businesses by Tom Siders
TIPS 1. Start a turnaround effort with benchmarking, which will help identify areas in which a business is underperforming and may have opportunities for near-term improvement. 2. While cutting overhead can be important for turning around a struggling company, make sure those cuts aren’t in areas that could support potential areas of improvement. 3. Growth is important, but it must be strategic and profitable growth. 4. Slow- and never-moving inventory should immediately be discounted in order to convert it into cash. 5. The biggest potential area for improvement with some companies involves shortening the cash operating cycle, which is the time between paying for purchases, converting them to inputs, selling them and collecting from customers.
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UPSIZE MARCH • APRIL 2020
WE ARE NOT turnaround specialists. Regardless, we are occasionally asked by intermediaries to intervene with a business in financial distress. Before accepting such an assignment, we ask ourselves, “Will CPR work for this business, or is it too late?” The answer almost always comes down to cash flow. With a troubled business, little else matters. If the business can be improved to produce enough cash flow to work out of the problem, applying CPR makes sense. If not, it is time to order embalming fluid. Why cash flow? Cash flow is the lifeblood of the business. Further, projected future cash flow is the single biggest driver of the price a sophisticated buyer is willing to pay for a business. Cash flow drives value. Improving cash flow We typically start rehabilitation projects with benchmarking. If the business is a member of a trade organization, typically there is industryspecific benchmarking data available. Otherwise, other generic sources are available from places such as the Risk Management Association (RMA). We use the benchmarking to compare the client’s financial ratios and key metrics to other businesses of similar size and industry. Identifying the data for which the client is in the bottom quartile, or bottom half, helps identify the areas within the business that can produce near-term improvement in cash flow. With the benchmarking data, we typically find four areas that can be addressed by cash-starved business-
es. But since cash flow drives business value, even healthy businesses should consider some attention to these four areas on a regular basis. Overhead Businesses in financial distress typically slash overhead, often in the form of across the board cuts. While reducing overhead is necessary for a troubled business, care should be exercised to avoid cutting into muscle or bone. Cuts to marketing can damage revenue growth at a time when additional revenue may be needed to work out of the problem. Mandatory pay cuts, especially in the current job market, can cause an unwanted loss of talent. Excessive or misdirected overhead cuts can further damage the business. However, regular control of overhead is good business hygiene, even for a healthy company. We worked with the owner of a profitable, growing manufacturing business who conducted a head count on the first of each month. He believed his business required three employees producing goods or services to support the budget for every nonproduction or overhead employee. So, no new “overhead” position could be filled unless there was sufficient growth to add three new production personnel. Growth Often, financially troubled businesses attempt to grow themselves out of the problem. This is an admirable goal. The challenge is how to grow sales. If marketing and sales resources are downsized through overhead cuts, growth could be a challenge. If the strategy is to cut prices to
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