How to Solve Cash Flow Problems: Turnaround and Recovery

August 16, 2018

Uncertain. It’s a pretty good word to describe the business climate facing Canadian enterprise these days. Since January, the United States—which receives 70% of Canada’s exports—has imposed tariffs on steel imports, aluminum imports, solar panels, washing machines and announced plans to provide US farmers with up to $12 billion in subsidies.

When you combine these challenges with macroeconomic factors—such as heightened competition, skilled worker shortages and minimum wage increases in various regions across the country—it’s no surprise that many Canadian businesses are running into debt and cash flow problems.

What is a Cash Flow Problem?

A company experiencing a cash flow problem is simply one whose actual or projected cash outflows exceed its cash inflows. In simple terms, the company doesn’t have the money, or expect to have the money, to pay its bills.

Cash flow problems may be the result of systemic profitability issues or acute short-term challenges, for example, a delay in payment from a large customer.

Notably, businesses facing cash flow problems are not necessarily unprofitable. In fact, a profitable business may run out of cash because it is growing too fast and has a long cash conversion cycle.

Getting the Diagnosis Right

Like any business challenge, finding cash flow solutions starts with the correct diagnosis. Sometimes the cause of the difficulty can be obvious. For instance, one of our clients experienced cash flow challenges after losing its largest customer, which represented approximately 70% of sales.

Often, though, there are a confluence of factors which contribute. In another situation, delays associated with a plant move, higher steel prices and the loss of business from a large customer all contributed to the company’s troubles. In instances where there are multiple causes, it is very important to perform a detailed financial analysis to understand the degree to which certain suspected causes have affected the bottom line and give the company the opportunity to get a better grip on its financial future.

Turnaround Plan

Once the root cause of each problem has been found, the company should put together a turnaround plan and tackle each problem. There is a myriad of different options to be considered as part of a plan. For example, if cash needs are short-term, negotiating a “bulge” in the lending facility, faster payment terms with customers, or longer payment terms with suppliers are all options to consider. It may even make sense to explore alternative financing options such as factoring.

If longer-term profitability is an issue, various cost-cutting measures such as closing unprofitable locations or divesting unprofitable lines of business should be considered. Alternatively, it may be necessary to negotiate higher prices from customers or enter into longer-term payment plans with suppliers. If none of these measures work, however, it may be time to file a formal insolvency proceeding.

Likewise, a financial model can be an invaluable tool in helping evaluate which options to pursue in dealing with cash flow problems. A proper financial model will include a forecasted income statement, balance sheet and cash flow statement. It will also forecast lending covenants and the borrowing base.

Telling the Story

While no one enjoys talking about financial and debt problems, upfront dialogue with lenders, key customers and key suppliers can dramatically increase the chances of a successful turnaround—provided you convey a clear diagnosis of each problem and a sound action plan to address it.

A financial advisor can be a valuable partner in this regard. In addition to providing expertise and access to alternative financing options, a financial advisor can also examine the company’s challenges and vet the turnaround plan—providing stakeholders with a heightened level of confidence.

An unbiased third party, in combination with a thorough financial model, can also help ensure stakeholders understand exactly what is being asked of them. For example, if a bulge is being requested, an advisor will make sure the lender knows the amount required, the time it will take to pay it back and what the borrowing base will look like throughout the forecast period.

A Proactive Approach

While it’s true debt and cash flow problems can lead to formal insolvency proceedings or restructuring, they don’t have to. With early detection and the execution of a sound turnaround plan, it is possible to get back to positive cash flow.


Rob Stelzer is a Managing Director with the Restructuring practice of Farber. His practice focuses on acting as a Proposal Trustee, Receiver, and Trustee for distressed businesses undertaking a restructuring or an insolvency proceeding. Rob can be reached at 416.496.3500 and rstelzer@farbergroup.com.