While waiting in line at the grocery store, a four-year-old girl grabbed a piece of candy and nonchalantly placed it on the checkout belt. The cashier’s smile tipped her father off and he efficiently took the candy and put it back on display. Seconds later came the pout that could melt a thousand hearts followed by, “WHY CAN’T I HAVE IT!” to which her father responded, “You need money to buy it, where is your money?”
Somehow a child can cry, shout, stomp and breathe all at the same time. Boxes of candy were ripped from the display and went flying through the air as if a three-foot tall tornado blew through the lane. No money equals no candy; that simple fact was enough to turn this child into an unstoppable 34-pound wrecking ball.
While corporate managers do not act like four-year-old children denied candy, people do have visceral reactions when liquidity is tight and profitability is declining; managers point fingers at each other; executives bury their heads in the sand; someone jumps in his or her car and races toward the horizon — perpetually chasing a rainbow’s elusive pot of gold.
During careers as turnaround professionals, we have learned that people genuinely care about the work they do, even during a liquidity crisis. Company personnel tend to struggle in their ability to emotionally detach from the situation: a step that is critical in understanding and addressing the liquidity challenges in front of them.
With that in mind, the following approaches were gathered from a combined 25 years in the turnaround industry, and will be useful to management in addressing a business’s liquidity challenges.
Accept the Challenge and Become the Leader for Change
First comes denial, then comes the finger pointing. Assigning blame does not get one any closer to a solution, but that often occurs when a business faces liquidity constrictions. Executives focus on the historic successes of the business, waiting patiently for those days to return. They know the liquidity crisis is imminent, but lost in nostalgia or paralyzed by fear, they fail to take action.
Theodore Roosevelt once said, “In any moment of decision, the best thing you can do is the right thing. The worst thing you can do is nothing.”
In a turnaround situation, management must continue to press forward. Do not be afraid of making an imperfect decision. That does not mean be reckless; be thoughtful and fact oriented, control the team’s emotions, become a leader for change within the business, and begin to develop a plan to better understand and address the liquidity challenge.
Understand the Situation
When will the business run out of liquidity? This is the single most important question that needs to be answered. Fortunately, it can be answered quickly by developing a 13-week cash flow that provides insight into the timing and depth of the liquidity trough. This tool offers visibility into the business’s operating, non-operating and non-recurring cash flows. It should provide insight into working capital accounts and borrowing base availability. The development of the tool may shed light on the potential cause of the liquidity challenge. Has growing revenue placed a strain on working capital? Is this a seasonal challenge that will remedy itself in short order, or is this a broader issue of deteriorating business fundamentals that requires a turnaround plan?
If the business does not have the experience or the bandwidth to create this tool, hire a professional.
• Identify the right team members in the business to develop the triage strategy, recognizing that their time could be consumed by this process.
• Be realistic and conservative. Now is not the time to chase rainbows.
• Historical patterns rarely change without a clear catalyst. Do not assume major changes in revenue or receipts without strong support.
• Use the direct cash flow method. This helps management identify meaningful drivers of receipts and disbursements.
• Ensure actual receipts and disbursements can be captured to track progress against plan.
• Pay attention to receipts and disbursements that have abnormal timing (e.g., tax refunds, asset sales, insurance, real estate/property taxes, etc.).
• Do not print and hold checks. Storing printed checks in a drawer is not an appropriate method of cash management.
• Prepare the cash flow on a book basis, not a bank basis. When you cut a check, you relieve cash — remember to include the float.
Use Management’s Time Wisely — Develop Both Immediate and Long-Term Game Plans
Identifying the liquidity crisis is analogous to seeing the last few grains of sand about to drop to the bottom of the hourglass; management is nearly out of time and should act proactively to resolve this crisis. Begin by promptly understanding what liquidity levers are available to the business. Once the nature of the liquidity trough (timing and cause) is understood (through the development of a 13-week cash flow) focus on stopping the bleeding and improving the business’s liquidity position. Bridging the cash shortfall may provide the few additional weeks of time required to develop a long-term restructuring plan. Either way, identify the levers that the business can use to its advantage and execute them immediately.
Develop Task Forces to Generate Additional Liquidity
• Convert orders into sales, then sales into collections.
• Expedite the collection of aged receivables.
• Offer incentives to customers for early payment.
• Become lean and mean. Reduce expenses wherever possible.
• Manage cash disbursements. Establish policy and assign a team to review disbursements before checks are cut. If you don’t have the cash, don’t cut the check.
• Sell excess inventory and/or idle assets. Turning inventory into receivables may improve availability in the business’s revolver.
• Negotiate new payment terms on debt.
Once a plan to stabilize the immediate liquidity crisis is developed, shift focus to developing a long-term restructuring plan. This plan requires management to answer two specific questions:
• Does the business have a reason to exist?
• Does the business have the appropriate capital structure to support it?
Restructuring plans cover a broad spectrum of business outcomes, including raising new capital, scaling back the business to its core operations, and selling or liquidating the business.
• Set measurable milestones to help management execute against their business plan.
• Address concerns of stakeholders in the capital structure.
• Properly size the capital structure required for the restructured business’ go-forward strategy.
• Document all major assumptions to add credibility to the business plan (be clear, be reasonable and be consistent).
• Shrink the business to allow the company to be more profitable.
In one case involving Deloitte CRG professionals, a company underestimated the cost to complete a project by $40 million, causing a severe liquidity crisis and requiring immediate action. A 13-week cash flow was prepared, which determined that the company was on track to run out of liquidity within two weeks. In the short term, Deloitte CRG was able to drive immediate liquidity improvements through reduced expenses, expedited collections of aged receivables, improved vendor terms and deferred payments. These actions extended the liquidity life by almost three months. This additional time was then used to develop a more detailed turnaround plan that prioritized build-out efforts, sold assets to generate cash and eventually provided the business with enough liquidity to bridge the liquidity channel.
Communicate with Stakeholders
While successes are celebrated through song, challenges are shared by whispers and spread like a cancer through the business, eventually killing morale if not addressed immediately. Be proactive about communicating challenges with each business stakeholder, and be certain to understand the concerns of the constituents. This is true for external stakeholders, such as lenders and investors, but also for internal stakeholders, such as employees; in a distressed situation, trust has been lost and needs to be regained.
Various Techniques for Effective Communication with Stakeholders
• Develop regular (typically weekly) calls with lenders and other critical stakeholders.
• Communicate how the business plan addresses the liquidity challenges. Be clear and consistent in messages to all stakeholders.
• Restore confidence and trust by providing weekly cash variance and operating flash reports.
• Establish a recurring call or meeting with employees to articulate the plan and help them understand how the plan impacts them.
Managing a liquidity crisis is a difficult process to endure. Unfortunately, liquidity concerns will eventually become a reality for every business. Having the right mindset and tools to address the challenge can be the difference between a successful recovery and a failed business.
Rudy Morando and Sugi Hadiwijaya are senior vice presidents for Deloitte CRG.