Cure “Cash Crunch”: Increase Cash Flow And Liquidity

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A temporary cash crunch situation is something that occurs in the ordinary course of business in most every organization, especially when the business is of a seasonal nature or when the businesses is in a rapid stage of growth, i.e., inundated with purchase orders but without sufficient cash to fill them and to also pay recurring expenses. But if a cash crunch situation is chronic, a diagnosis of the reason must be made, and appropriate actions must be taken. This article will give you the ability to do both.

Bear in mind that when I speak of revenues, I mean total sales, both as computed on the cash basis and the accrual basis, but when I speak of expenses, I actually mean cash outflows of every nature. Throw away the accounting and auditing textbooks for just a bit so that we can deal with bare bones economic reality. Also by current, I mean as either generated or paid in the ordinary course of operations.

Preliminary Feasibility Analysis:

Most every enterprise experiences a period or periods of cash crunch, especially if those businesses are either seasonal or rapidly-growing companies which are generating purchase orders, but do not have adequate cash to fill them while still meeting their obligations, such as payroll, occupancy and the like. There are remedies for both of these situations because they are either predictable or can be financed with short-term debt to enable them to either withstand the “tight season” or to let their cash flow catch up with their market demand.

If cash crunch is chronic, and is an ongoing problem, there is something wrong with the business on a fundamental level. Either revenues are too low, or current expenses (outflows — remember that we’re using lose terminology here) are too high.

If the expenses or outflows are not truly for operations but payable to a lender in the form of , for example, a short-term self-amortizing debt where the payments are large and swollen with principal, the lender may be negotiated with to arrive at an interest-only loan with a provision for a rollover of the principal at the end of its term (optimal for maximizing utilizable cash flow), or possibly a longer amortization period where the payments are lower, conserving more cash flow for operations.

Sometimes a business is improperly capitalized and it requires equity to be infused in order to retire debt. Many businesses which have good fundamentals need to de-leverage themselves by retiring existing debt with equity. This is appropriate unless the equity is used to cover current expenses.

The test is this: If you deduct the debt payments from the total current outflows, and you subtract the number obtained thereby from the revenues, the resulting number should be positive. This means that the business is not properly capitalized, but is probably fundamentally sound. These companies are good candidates for refinancing.

If the number obtained is still negative, then it is highly likely that the business is fundamentally unsound, either due to its core purpose, mismanagement or some improper assumptions which have gone uncorrected for too long. Revenues can be increased by increasing sales through better marketing and sales, or by increasing prices if the market will tolerate this.

When certain food or beverage prices are suddenly increased, a restaurant may hike up its prices  and say, for example that “due to the increase in the cost to us of coffee, we are sorry to have to raise the price per cup to $2.25. If the market tolerates this it is a wonderful strategy, especially if done in steps, or if accompanied by a re-packaging or the product or service to somehow differentiate it from what it was previously. The perception of added-value tends to justify an increase in price.

The other possibility is more difficult, and the prospects less pleasant: You may have to negotiate with your employees (or terminate some of their positions), cut back on the use of your contractors, or re-negotiate costs with your vendors. Vendors can often be persuaded to reduce their charges by 1) indicating that the situation is temporary, and that they’ll receive a premium after you’ve reached a certain sales level or after a certain amount of time has passed or 2) an incentive wherein the vendor participates in either your revenue when you’ve reached a certain threshold, or in you company’s ownership (this is an example of a partial vertical integration strategy).

The acid test of  the fundamental soundness of any simple business model is this: If debt service is eliminated, do revenues exceed current expenses. Put more realistically, without considering debt, do your revenues (where the earnings process is complete and they are either in the form of cash or accounts receivable) consistently exceed your ordinary current operating outflows including product (inventory purchases as required) or service purchases? If not, can they be restructured to fit the aforementioned  parameters? If the answer to both questions is “no,” your business model is fatally flawed, and that must be dealt with — we’ll discuss this at another time.

If you increased your sales volume, increased your prices to customers, eliminated any idle personnel, negotiated with your suppliers, and gotten your bank loan replaced with equity, then you still may be suffering because your customers are not paying you on a timely basis, while you’re paying your vendors promptly.

If your average days to payment on your accounts receivable is 55, and your average days to payment of your current expenses is 35, that 20-day discrepancy can be killing your business, depending upon your profit margins. Sadly, you can’t pay your vendors with your receivables. There are two things to be done to eliminate that 20-day discrepancy:

1) Collect the receivables faster; and

2) Pay your vendors more slowly.

That gap between average days that your business waits to collect its receivables, and the average days its takes to pay its vendors must be reduced to zero, or to a negative number.

You can collect your receivables faster by offering some of your less creditworthy customers less credit, and giving some of your better, faster-paying customers more credit. You can offer early payment incentives or cash payment discounts. You can collect partial payments in cash. Use some imagination. Any of these approaches alone or in combination will cut that 55 days significantly if you focus on achieving this.

You might even get a line of credit up to some percentage of your “acceptable” accounts receivable,  factor your receivables, or utilize single invoice financing in order to get that number down a great deal further. Often the real cost of factoring or similar arrangements is about equal to what you might sacrifice if all of your customers took advantage of a discount for paying in less than 30 days.

To eliminate turning a simple article into a doctoral dissertation, suffice it to say that slowing down payments to your vendors requires some diplomacy, some negotiation, and some creativity — but then, if you are in business in these times, you must have an abundance of creativity.

Quick, Easy Metrics:

1) Your average collection days on your receivables (it’s a weighted average) should equal or exceed your average payment days on your current bills;

2) Your average collections days on your receivables divided by your average payment days on your current bills should be equal to or (hopefully) greater than 1.0;

3) The value of all of your cash and all of your receivables divided by the amount of your current bills should always be significantly greater than 1.0 (i.e., no contribution margin). While this is not a measure of cash availability, it is a measure of your gross profit on sales. The bigger the dividend produced by this computation, the greater your basic profit margin and the greater the contribution of your sales to ultimately cover fixed overhead.

The idea is to avoid a cash crunch (assuming that your basic business concept is fundamentally sound) by collecting and hoarding as much cash as you can, and holding off on the payment of bills as long as you can. Remember:  If you business is sound, a cash crunch crisis is a phenomenon only created by bad timing. And it’s quite curable.


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D.E.Castle's Daily Business Advisory Wrap-Up.
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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Turnarounds,Restructurings,Bankruptcies:Checklist

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This CEO Has Just Discovered That His Company Is in Deep Trouble

There are all types of tools, terms and radical actions used to describe techniques, protocols or proceedings at law for businesses that are troubled, and these terms tend to be tossed around loosely in a crisis management panic mode; the most popular ones are turnarounds, restructurings, bankruptcies [actually protection pursuant to Chapter 13 of the Federal Bankruptcy Code] trustees, “Chief Restructuring Officer/Advisor” [a title which is becoming increasingly popular and that I increasingly wear], bulk asset transfers, immediate cutbacks (or summary firings, usually of the wrong individuals).

The first step to undertake if you are a concerned party – a possible litigant, a person or fund who/which stands to lose, even an employee labor organization (formal or otherwise) which has a vested [no pun intended] interested in being able to permit its members to provide for their families’ basic needs. The air is filled with tension and fear. Clear thought is rare.

Before getting to the Checklist, be certain to do the following, as an involved person and as a key decision maker:

1) Think things through quietly and with complete focus;

2) Engage in financial triage – prioritize — assess the possible extent of the damage (be pessimistic in your estimates), and what five measure must immediately be taken to stop the situation from worsening. Don’t look at cause and effect or shaming and blaming; you haven’t the luxury of either time or immaturity;

3) Do not take action yet;

4) Assemble your core team or “kitchen cabinet” an advise them, in confidence, that a crisis is has occurred (and is still occurring);

5) Arrange an emergency meeting with your attorneys and accountants, as well as your core team. Then explain the situation in plain, noninflammatory language, appoint or hire your Chief Restructuring Officer and have him or her chair the meeting, wherein you review the points or topics set forth hereunder:

Strategic Positioning

Business Crisis Management

Negotiations with Stakeholders

  • Cost and Expense Reduction
  • Analysis of Creditor Rights
  • Liquidation Analysis
  • Dispute Resolution
  • Equitable Treatment of Classes

Profit (Cash Flow) Improvement

  • Revenue Enhancements
  • Cost and Expense Reduction

Insolvency and Bankruptcy

Litigation Support

  • Forensic Accounting
  • Lost Profit Analysis
  • Damage Calculation
  • Contract Auditing
  • Expert Witness Testimony
  • Deposition Support
  • Cause Analysis
  • Acquisition Due Diligence
  • Post Acquisition Integration

Mergers and Acquisitions

  • Acquisition Due Diligence
  • Post Acquisition Integration
  • Vertical Integration
  • Horizontal Integration
  • Conglomeration Or Other Business Combinations Of Expedience

The Chief Restructuring Officer now has to coordinate the efforts of the team for optimum, timely performance and corrective action.

As always, thank you for reading me, and for turning around (deliberate, contrived but funny choice of term) and sharing my articles with your colleagues, connections and topical groups through your social media platforms using your ever-expanding arsenal of social media sharing tools.

Douglas E. Castle


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Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Business Restructurings, Turnarounds And Remobilization Of A Nation’s Economy

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Fixing our broken businesses and bolstering our true economic growth - Douglas E. Castle

 

In industrialized nations, particularly the USA, the prevailing attitude is in either 1) the instant success or in 2) the disposable item. That disposable item can be a small to medium-sized business which is experiencing some financial turmoil and might well be on the road to Reorganization pursuant to Chapter 13, and more often than not, to a Chapter 7 liquidation proceeding.

The terms and notions associated with business “repairs,” or outright cures such as turnarounds (i.e., turnarounds leading to sustainable solvency with a healthy and consistent positive cash flow), restructurings, negotiations, workouts, re-amortizations, debt-equity conversions, debt-service coverage increases, re-budgeting, a Re-Emergence Plan,  creditor settlements,  investor arrangements, employee buy-in /buyout plans, and management buy-in/buyout plans. [Please feel free to look under the DEFINITIONS Section in this blog’s navigation bar if any or all of the foregoing terms seem or seems unfamiliar to you.]

The calculus of this focus on start-ups to the extent that troubled businesses have become neglected or stigmatized as “corporate raider targets (Dell Computer, anyone?) or “extinct” simply because they are not genesis centers for new technologies, or because they do not have venture capital curb appeal (anyone interested in saving a ball bearing or paper clip manufacturing business? – I can hear your deafening silence as I watch [I can’t literally look at you through your computer or device, but I like to be as fearsome and awe-inspiring as possible] you look down in shame at the floor).

You don’t have to be a calculus superstar to visualize that a small start up entity might create five jobs this year, and fifteen next year, and perhaps a number more (if they are not bought up by Google, in which case, some of those jobs will likely evaporate into a consolidation), while saving the Cruddleston Corrugated Packaging business [fictitious, but which would possibly be located in in the “Rust Belt” of the USA or near Newark, New Jersey] might conserve 80 existing and productive jobs, and might create new employment (perhaps another 10 – 20 permanent full-time positions as well as some precious student internship training.

Perhaps the bloom is off of the proverbial rose when it comes to manufacturing and industrial businesses in the small ($1 million up to $100 million in sales revenues) to medium-sized ($100 million up to $500 million per year in sales revenues) sectors. Part of the difficulty is that these businesses cannot necessarily be fixed and set on the right trajectory without investing some serious analytic, planning and implementation time. Negotiations, correspondence, restructuring and a multitude of changes, some of which will be painful but which are necessary, will have to be implemented and monitored. This usually requires the retention of an outside specialist, in additional to legal counsel — there are a plethora of law firms, but very, very few positive-minded, tough turnaround advisors (or business leaders of this age in general) who understand that 1) not every business problem can be cured by throwing bundles of cash at it, and 2) that it is not pre-ordained by any “Higher Authority” that because a business has problems that they must be fatal.

If these prospectively viable turnaround clients fail (and it isn’t a failure which is based upon technological obsolescence or a colossal and uninsured legal judgment or settlement) it is because they were convinced that they could never recover, and that the path most frequently taken is either directly to Chapter 7 or being on Chapter 13 “life support” – with the expectation of a fatality so no restructuring and Re-Emergence Plan is even hinted at. Working to save the company and its jobs is definitely the road less traveled. Death of the entire mid-section of America — which is not the true subject addressed by the JOBS Act or anyone’s legislative, regulatory or professional menu —  has been occurring at an increasing rate, and is perceived as a self-fulfilling prophesy.

In my professional capacity, I am keenly aware that most company owners, management, directors or even legal counsel do not know who to turn to to perform this type of special precision surgery.

The problem is one of epic proportions. The following statistics for court bankruptcy filings of businesses were provided by The American Bankruptcy Institute for the entire United States, based upon data accumulated from judicial records:

Quarterly Business Filings by Year (1994-2012)

Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
1994 13,858 13,617 12,878 12,021 52,374
1995 13,123 12,216 12,648 12,891 51,878
1996 13,388 13,992 13,198 12,887 53,465
1997 13,831 13,991 13,456 12,653 53,931
1998 12,410 11,552 10,346 9,888 44,196
1999 9,180 10,378 8,986 9,020 37,564
2000 9,456 9,243 8,211 8,413 35,472
2001 10,005 10,330 9,537 10,013 40,099
2002 9,775 9,695 9,433 9,500 38,540
2003 8,814 9,331 8,446 8,294 35,037
2004 10,566 8,249 7,574 7,778 34,317
2005 8,063 8,736 9,476 12,798 39,201
2006 4,086 4,858 5,284 5,586 19,695
2007 6,280 6,705 7,167 7,985 28,322
2008 8,713 9,743 11,504 12,901 43,546
2009 14,319 16,014 15,177 15,020 60,837
2010 14,607 14,452 13,957 13,030 56,282
2011 12,376 12,304 11,705 11,149 47,806
2012 10,998 10,374 9,248

You’ll note that the highest number of filings was in 2009, one year following the central banking system and capital markets meltdown that decimated this country’s economy, with the rest of the Global Economy to follow soon thereafter.

One insidious implication, referring again to the above table, is that businesses in the United States (as well as their clients and consumers) were so dependent upon access to credit and the expectation of serial refinancing to prop up cash flow, that they had no cushion of equity in the form of cash reserves, and the other implication was that these companies were taking some liberties with what they considered to be collateral assets, profits and earnings.

These companies, and their legal representatives where virtually running to the courthouses to throw their businesses away. They were collapsing like dominoes, and the overwhelming negativity in the emotional drivers of the economy accelerated this flight to the express route. Many of these companies were unaware that possibilities existed for a reversal of their fortunes — and those who actually thought of the possibility of a means of saving the business by bringing an outside expert inside simply did not know where to find an expert.

Applying some simple and strictly hypothetical assumptions to the numbers set forth in the  above table for the second calendar quarter of 2012, let us say that :

  • 10% of the companies (that’s 1,037) could have been saved;
  • That each company, while operating at full capacity, had on average of 75 full-time employees;
  • That if all of those existing jobs could have been saved, the total of persons seeking unemployment assistance or very low-paying jobs would have been reduced [just for that quarter!] by 77,779.

I believe these numbers to be reasonable.

In sum, companies do not have to die for their mistakes, transgressions and lack of adequate stewardship. There is help for them. It shouldn’t be a secret.

Thank you for reading me and for sharing my articles with your colleagues, connections and contacts over your numerous social networks.

Douglas E. Castle

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This site is proudly affiliated with Global Edge International Consulting Associates, Inc. ["GEI”]
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Respond To Douglas E Castle
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Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.