Keeping your business afloat – and profitable – in tough times

Timing is critical when a business is underperforming – it can be the difference between a business going under or turning performance around.

Whether a company is underperforming, is in distress or simply facing major change, there are many challenges to be faced. Sometimes outsiders can see more clearly what is going wrong with a business than the people who are actually running it.

On a daily basis, Vantage Performance is working with clients who want to turn their businesses around. This article will share some insights into the early warning signs that we see daily in underperforming or troubled companies, and positive actions companies can take to remedy the problems.

It’s important for management not to leave it too late to ask for help – many businesses that end up in receivership could have been saved if they had heeded early warning signs and sought advice or assistance at the appropriate time.

There are common threads that emerge from businesses which get themselves into trouble. These are what we describe as internal causes of underperformance. In many cases; management have been too focused on growing revenue without considering the impact on margins and profit, businesses don’t have the right systems and controls in place to manage their working capital (businesses that are growing rapidly can quickly come unstuck if they don’t aggressively manage their debtors, stock and creditors), businesses don’t have the right depth of skill in their management team, they don’t review financial and operational performance on a regular basis and in many cases the business has outgrown its finance facilities.

There are also early warning signs, if business owners and business leaders can lift their heads up from the daily grind to notice. The following is a list of the major warning signs that management teams (and their advisors), should be alert to:

- Working capital growing faster than revenue
- Difficulty in obtaining finance
- Management “buying” sales at the expense of margin
- Loss of a key customer
- Increase in staff turnover
- Increasing creditor pressure
- Inability to pay tax and superannuation liabilities
- Impending banking covenant breaches
- General industry downturn or consolidation within the industry

The following is a summary of the major remedies to combat many of the key issues that businesses will be facing at present.

- Put in place a robust 13 week rolling cash flow so you can truly understand how cash flows through your business and when key flash points may be arising.
- Implement systems that accurately calculate the profitability of your products and/or services. For unprofitable products, raise prices or consider dropping them altogether.
- Identify slow moving or obsolete stock and be prepared to cull products that are simply not moving fast enough to warrant keeping them. Be ruthless, if the products are not moving then your customers don’t want them!
- Develop a strategy to deal with your major stakeholders (bank, key suppliers, key customers, shareholders and employees). Keep communicating!
- Develop a marketing strategy to win new customers so you can decrease any customer concentration risk you may have.
- Document a strategic business plan including detailed forecasts so you can demonstrate to your financiers that you are working to a plan. This will increase or maintain their confidence which is crucial at present when it is harder to raise new finance.
- Review your management team, do you have the right mix of staff with appropriate skills? If not, decide if the existing team can rise to the challenge with additional training and mentoring. If you are not confident don’t waste time hoping that will someday, consider recruiting experienced staff to plug the gaps.
- Conduct a review of your processes to identify any areas of labour or time wastage. Are you really getting your products and services to market as efficiently as possible?
- Consider engaging a specialist business turnaround firm like Vantage Performance to project manage many of these strategies so that management can stay focused on the core business.

Working Capital – the amount of cash tied up in accounts receivable, inventory and accounts payable will be the No. 1 issue for many businesses in the months ahead as they fight deteriorating market conditions. Given that working capital and cash flow is such a critical issue for many businesses at the moment we have explored the area in more detail below.

Any improvement in working capital is beneficial, whether the funds are used to pay down debt, fund capital expenditure, satisfy seasonal cash flow requirements or further invest in research and development.

Whilst it will be critical to keep a tight control on working capital, as a deterioration in accounts receivable days or stock turnover will have serious impacts on cash flow, there are always significant opportunities to improve the current level of working capital to improve cash flow.

The following is an example of the level of cash that can be released:
- Average Receivables $10M (55 days/sales)
- Average Payables $7M (40 days/sales)
- Average Inventories $3M

By reducing accounts receivable collections by 5 days (or only 10%) we could improve cash flow by $1M. By increasing accounts payable by only 4 days we would improve cash flow by $0.7M. By reducing stock levels by only 10%, $0.3M cash would be released.

There are a range of strategies which can be deployed to achieve these results which could result in an improvement in cash flow of $2M or more. This “released” cash could then be used for debt reduction, capex/re-investment or return to shareholders.

As a result of making the improvement this business becomes more efficient, return on capital is increased, and management’s cash flow targets are exceeded.

In our experience in running Working Capital Optimisation programs in a range of different businesses shows that a 10% improvement tends to be at the lower end of the range achieved. Some of our client businesses have generated up to 25% improvement in their working capital - equivalent to a release of up to $4.5M in the above example.

As a business process, working capital is driven by an interlinked series of activities we refer to as a working capital chain (purchasing stock, manufacturing goods, selling the goods, and collecting and making payments etc.)

Working Capital Optimisation uses what we call a holistic approach – exploring the processes along the chain and improving the management of working capital from end-to-end by working with the key people who drive it to enable them to discover improvements.

The key features of this process are:

- it involves the people driving the working capital chain;
- it raises their awareness of the value of time in relation to working capital;
- it shows them the processes they are involved in and how they are performing financially;
- it provides a structure within which they can identify and explore problems and opportunities;
- it enables them to discover how to change permanently what they are doing in order to release cash, both through improvements in internal processes and through changes in the way they trade externally;
- and, crucially, it motivates them to implement those changes.

Improving working capital management by as little as 10% can generate significant cash flow, and this is possible even when no obvious working capital problem exists.

CASE STUDY - Brisbane Concrete Pumping Group

Background
Queensland’s largest concrete pumping business, with a blue chip client base and 80 employees, found itself struggling under bank debt of $22 million. For the past two years they had reported trading losses and the loss for financial year 2008 was about $2 million. BCP appointed Vantage Performance in October 2008 after the business had been placed in Receivership and Voluntary Administration.

Key issues
• Group was in Receivership and Voluntary Administration
• Refinance was not an option
• Group was over geared
• Lack of management depth
• Poor working capital management
• Additional working capital required
• Major debt reduction required
• Core business still viable

Key Initiatives
• 13 week cash flow and detailed integrated forecasts
• Capital raising
• New management team
• Restore stakeholder support
• Produce strategic business plan and Deed of Company Arrangement proposal
• Negotiate with Receivers, Voluntary Administrators, creditors, and all 8 financiers

Outcome
• Proposal was approved by 100% of creditors
• $2M injection of working capital
• Bank facilities restructured
• Material reduction in bank debt
• Stakeholder relationships restored
• Conclusion of Receivership and Voluntary Administration
• Control returned to directors in mid January 2009

CASE STUDY - Project Bumper

Background

This well established manufacturing business with a blue chip client base had grown by 93% over 3 years to reach an annual revenue of $46M. Unfortunately, management had not implemented sufficient controls and management skill to maintain control of this growth culminating in a loss of $4.4M for financial year 2008.

Key issues
• Poor working capital management
• No visibility of product & customer profitability
• Refinance not an option
• Lack of management depth
• Core business still viable
• 80% staff turnover
• Business requires additional working capital

Key Initiatives
• 13 week cash flow and detailed integrated forecasts
• Price increases 6% - 22%
• Capital raising
• New CFO, HR Manager and Supply Chain Manager
• Stakeholder communication strategy
• Employee retention strategy
• Cost reduction (direct and indirect)
• Sale of non-core assets
Outcome

• $3.1M in financial support
• Conversion of $2M of debt to equity
• Stakeholder relationships restored
• Staff turnover down to 32% (in 10 mths)
• July to December 2008 profit of $0.3M (versus a $4.4M loss for financial year 2008)

Our Vantage Performance team is looking forward to interacting with you again.

Regards,

Michael Fingland
Managing Director

Vantage Performance Team
Profit Improvement and Turnaround Specialists
www.vantageperformance.com.au

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