Funding A Business Turnaround 5 Managing A Cash Crisis Continued

Managing a cash crisis so as to achieve a business rescue involves tackling four areas, the last two of which are reducing the amount of cash going out and getting more cash coming in by way of everything from asset sales, to new investment and in the longer term to achieving sustained increased profitability which to me is the real turnaround definition.

Step 3 Reduce the Amount of Cash Going Out

Just as with everything else in life, what you don't spend, you get to keep, so look at:

- Cancelling voluntary outflows back to shareholders such as dividend payments.

- Cutting back or cancelling:

- Advertising and marketing (but only after assessing how immediate the link is between this and sales and do not cut advertising that is vital for short-term turnover).

- Training; but keep any required to meet statutory requirements.

- Research and development; but assess the risk that you may run of losing any key projects or staff that are vital to the long-term recovery plan.

- Capital expenditure; but assess how vital any such planned expenditure is to improving profitability in the short-term or the long-term turnaround plan.

- Increasing creditor payment periods by agreement with suppliers.

- Negotiating scheduled payments with key creditors or HM Revenue & Customs (an informal arrangement). If agreeing scheduled payments with suppliers, be clear as to what proportion of the payments made is going to be used by the supplier to reduce the total amount you owe and what proportion will be used to allow further supplies on credit.

- Consider using an insolvency act procedure such as a Company Voluntary Arrangement (CVA) or administration to obtain protection or agree a formal binding deal with creditors.

- Consider whether any key creditors might be willing to convert their debt to shares in the business (a debt for equity swap) if this is acceptable to the existing shareholders.

Step 4 Get More Cash Coming In (Or Credit From Elsewhere)

Other than trading, possible other sources of cash are from:

- selling assets;

- improving profit generation; or

- raising new borrowings or obtaining investment.

Selling assets: Review the assets on your balance sheet to identify:

- Surplus fixed assets (land and buildings, plant and machinery, motor vehicles) that can be sold.

- Assets that could potentially be made surplus (and then sold), for example by subcontracting out your manufacturing processes.

- Essential fixed assets that you need to continue to use, but which can be sold and leased back to provide cash.

- Underutilised plant and machinery capacity that can be hired out, or spare factory or office space that could be sub-let.

- Separable and saleable investments, subsidiaries or any parts of the business (such as a specific branch) that could be disposed of for cash

- Is there any equipment lying around that is not even on the balance sheet that can be sold?

Improving profitability: Fundamentally, to improve profits requires achieving some combination of the following, depending on which area is most responsible for the problem:

- Increasing turnover; by increasing some or all customer numbers, value of spend per customer or frequency of spend

- Increasing margins; by reducing costs of sales; and/or

- Reducing overheads; which includes dealing with any non-performing parts of the business that are dragging the rest down.

In the situation of a cash crisis, the steps that have the highest short-term return tend to be focused on cost reduction (although often simply raising prices is a surprisingly easy early win). In the longer term the focus shifts to re-positioning the business so that it moves into the most profitable areas open to it.

Raising new borrowings or obtaining investment: There are a number of sources of funding that can be looked at but please do bear in mind the 'Wealth Warning' given in the first of these articles:

- Use your cash flow forecast to seek an extension of your existing bank facilities or other borrowings to cover the forecast requirement. If appropriate, seek to agree deferment of loan repayments or to roll up interest for later payment. Do you have any unpledged assets that can provide security for new loans, such as brands, trademarks, and other intellectual property rights?

- Asset based lenders who specialise in lending against a specific type of security (such as factors who lend against your debtor book) will often advance a higher loan to value against these assets or security than may be available from normal banking arrangements. Can you use such sources to obtain more borrowings against your assets than you currently have available from your bank?

- Consider your trading partners, agree new stocking arrangements with supportive creditors such as sale or return; pay when paid; or agreed longer payment terms; ask customers to supply free issue stock for you to work on so that you do not have to buy in materials.

- Seek injections of capital from existing shareholders or directors (your bank may well put pressure on for this to happen in any event as a sign of commitment to the turnaround , as well as a way of managing or reducing its exposure).

- Seek investment from specialist turnaround equity investors.

Obviously we could drill down into each of the areas of action covered in this series of articles, such as for example profit improvement of which the comments above barely scrath the surface, to generate a greater depth of possible suggestions for actions, but hopefully this series will have given you some pointers as to how to begin to manage surviving a cash crisis and funding a turnaround.