Businesses are in a state of constant flux. They are either moving forward or in decline. When a business is in decline, there are opportunities to turn things around at various stages of the decline curve. Taking action early can be done while funds are still available. Left too late, the turnaround must be done under liquidity and creditor pressure in the “zone of insolvency,” where a liquidity event could trigger the need to file for insolvency protection. In most jurisdictions, this is a statutory obligation, usually defined as the inability to make payments as they fall due in the normal course of business. Although this may be a clear legal definition, in practice there can be some flexibility in this definition, particularly where a viable business exists and processes are in place to stabilise and rectify the adverse cash flow. A well-managed turnaround is in thebest interest of all stakeholders. However, priority must be given to ensuring that creditors are not put in a worse position than they would be in an insolvency. It is therefore imperative that cash collateral is not impaired during the process. To achieve this, a robust and effective cash flow management system is required. Themost effective tool for cashflow management is a 13-week cash flow model with sufficient detail to highlight the important receipts and payments. The model should build in critical payments and significant cash receipts, showing a weekly cash receipts total and a cash payments total, along with a net cash generation or deficit and a closing cash balance compared to funding facilities and a closing headroom. This should be positive across the period if insolvency is to be avoided. The report should be finalised before business closure at the week’s end, and variations of actual to forecast challenged, with people held responsible for shortfalls in performance. A revised forecast should be issued with achievable objectives; no moving goalposts! Peaks and troughs should be levelled out by realistic management of creditor expectations. All senior management should be aware of their responsibilities. They should know that they are part of the turnaround process, that they have obligations to a changing level of stakeholders, and that for them, it is not “business as usual.” Most turnaround managers would focus early attention by taking management control of the cash forecasting and cash management process. Cash control is the number one priority at the initial stage of an engagement. Only when the cash burn is stopped, cash flow is stabilised, and accurate forecasting is in place, can essential decisions on business viability and operational improvements be made. Controlling payments is an obvious first step, but some payments are critical, such as payroll and essential services like telephone and utilities, which usually cannot be delayed. There will also be pressing creditors for critical goods in the production process that will need careful management. The calming presence or intervention of a turnaround manager will often help achieve an acceptable payment approach to what had probably already become a fractious relationship. These payments must be factored in as priorities in the cash forecasts and adhered to. Failure to honour agreements or other essential payments can precipitate a more critical situation. While most pressure comes from the creditor side, there can also be a positive cash flow benefit from challenging invoicing and billing processes or resolving other disputes or cash generation activities. On one assignment, a large company’s invoice dispatch process was handled remotely from the team responsible for invoice calculation, resulting in a time gap of many days between work completion and invoice dispatch. Accelerating invoice preparation and dispatch generated a significant one-off cash bonus that alleviated creditor pressure. On another assignment, a long-outstanding and significant VAT receivable from an overseas customer had been left unresolved and filed in the “too difficult” folder. Diligent investigation by “A wellmanaged turnaround is in the best interest of all stakeholders”. Finance Monthly. Bus i ne s s & Economy 57
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