Is negative cash flow hampering your business? If so, Allan Nackan suggests a proactive approach—including the right diagnosis and a solid turnaround plan to help avoid formal insolvency proceedings and allow sustainable growth.
Uncertain. It’s a pretty good word to describe the business climate facing Canadian enterprise these days. In 2019, the United States—which receives 70% of Canada’s exports—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.
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.
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Allan Nackan is a Partner at Farber and co-leads the firm’s Restructuring practice. His practice focuses on corporate insolvency and restructuring, financial advisory services, cross-border restructuring, fraud investigations and forensic accounting. Allan can be reached at 416.496.3732 and firstname.lastname@example.org.