By Scott Anderson, Manager
Businesses are at war. They are in daily battles against escalating inflation, a persisting pandemic, potential tax increases and worldwide supply chain challenges. Compounding these issues are the dwindling stimulus programs that have propped-up American businesses through the ravages of COVID-19. While banks have been forgiving up until now, unfortunately, they are expected to increasingly apply pressure on businesses to go into debt workouts in 2022.
What should today’s innovative businesses do to prevent and address financial distress? They must take advantage of turnaround options – early. They should not wait until the ship starts to sink. Understanding and executing on turnaround options preemptively is key. Why? Because proactive action offers a broader – and more effective – array of options. Businesses who wait until their lender is knocking on their door with ratios that are failing or debt that is past due may not be able to access the breadth of options that would otherwise be available to them.
Likewise, preemptively implementing turnaround options offers an opportunity to reexamine business operations and optimize positioning for the future – even for businesses that are currently thriving. Key value drivers can be identified, cash flow can be optimized, the business can be re-tooled to be more successful and leadership can leverage turnaround strategies to think more strategically and innovatively. Having a strategic improvement plan can prevent catastrophe. As importantly, it can increase revenues and cut costs even for businesses that are thriving. Such options include but are not limited to:
- Focusing on cash to bring clarity
- Honing-in on profit centers
- Leveraging your network
Focus on Cash to Bring Clarity
Cash flow projections provide decision-makers with access to effective, streamlined insights that enable stronger decision-making. More specifically, a 13-week cash flow projection brings clarity to identifying key revenue-drivers. A strategic analysis of revenues and variable and fixed line-by-line costs uncovers opportunities and helps businesses surmount challenges. Such insights arm businesses with vision into the levers that must be adjusted in order to increase revenues and optimize expenses. 13-week cash flow projections allow a comparison of actual results to budget. They also enable reviews of weekly expenses to determine waste, eliminate discretionary expenses and unnecessary costs. In today’s pandemic environment, many businesses who undertake 13-week cash flow projections may find that transportation, utility and inventory costs are culprits of treading water.
While cash flow is a focus, smart businesses further actively manage working capital – they review accounts receivable by proactively reaching out to customers to determine expected receipts. When necessary, they set up payment plans to delay payments, if possible, or negotiate fixed expenses (such as rent).
Cash is king. PKF Advisory recommends building-up cash through stimulus programs, letters of credit, loans and alternative capital sources such as converting:
- Short-term to long-term debt
- Debt into equity by bringing in additional investor(s)
- Ownership by selling a portion of the business or selling business units
Hone-in on Profit Centers
Innovative businesses use turnaround options, such as examining their operations, so that they can focus on areas of profitability. For example, they analyze their business by product, SKU or business unit. Then, they position their business by eliminating low-margin products or services – while focusing on the value drivers that bring in more revenue.
They establish key financial (e.g., gross profit) and intangible KPIs (such as social awareness or diversity) to identify value drivers that bring profitability whether it means focusing more on volume or higher-end services. They weigh strategic options that could boost profitability – these include:
- Increasing prices (especially during inflationary periods)
- Exploring and obtaining all possible tax savings
- Selling unnecessary equipment, inventory and other assets
In addition, businesses should establish accountability across its business units. Strong accountability is rooted in strong leadership – and companies who are strategic, invest in competent managers across their business units. Regular meetings and leadership training are essential to establishing and maintaining competencies. Lastly, a collaborative culture that encourages innovation alongside strong governance complements a turnaround strategy that is focused on improving profit through competent teams.
Leverage Your Network
Many businesses underestimate the impact that networks can bring when leveraged. Members of the business’ network can include suppliers, professional advisors, bankers, employees, customers, third-party developers, distributors and others. Businesses must leverage relationships in their network to overcome challenges and take advantage of opportunities. For example, organizations frequently struggle with supply chain challenges during inflationary periods. Businesses should explore their networks and speak to advisors and other members of their network to determine whether products can be acquired more efficiently and cost-effectively. Similarly, when facing staffing challenges, businesses should leverage relationships with alumni staffing recruiters to try to fill gaps in staffing.
Businesses lose traction when they do not undertake the actions they should, do not have a strategy or when they focus on the wrong things. Every business requires a unique mix of strategic options to keep it afloat and prevent financial distress. Working with advisors who understand the business’ industry and who have deep expertise in turnaround strategies and distress are key factors to overcoming – and getting ahead of – financial turbulence.
According to Euler Hermes, a leading credit insurance company, “Business insolvencies are set to rise in 2022 as governments withdraw support measures that have helped companies stay afloat during the Covid-19 pandemic.” The best way to insulate against the winds of financial hardship is to implement strategies – now – that help bolster revenues and prevent or mitigate losses.
For additional questions contact:
PKF Advisory Manager