Global markets are struggling. Entire industries are grappling with various macro-economic issues. Interest rates are surging, inflation remains at an all-time high, and supply chain disruptions are ongoing.

However, companies that are proactive in optimizing their core operations, while being willing to make tough decisions, are typically the ones that emerge from periods of economic stress with less damage and a better position to thrive going forward.

Consider these concrete actions:

Generate and preserve cash

Ensuring adequate cash liquidity is of paramount importance during periods of economic uncertainty. Building a cash reserve from multiple sources can help bridge the gap when businesses experience declining revenues, rising costs, and higher interest rates. 

Consider the following initiatives, analyze every line on the balance sheet, and develop a specific plan for each, including:

• Clean up and collect accounts receivables:
  • Have clearly defined payment terms, and credit and collections procedures for the team to follow.
  • Set internal collections targets and communicate consistently with customers. Involve senior management on critical collection issues.
  • Ensure regular reporting from the collections team so that the right tactics are followed for each customer based on size, concentration, and profitability.
  • Analyze customer payment history and track changes over time. Develop a customer “watch list” that identifies and manages risk so that exposure is known in real time.
  • Consider offering discounts to incentivize customers to pay older balances, especially those that are either ineligible, or close to becoming ineligible, on a borrowing base.
• Carefully manage and control inventory levels:
  • Help ensure future purchases match current needs by having the appropriate mix of inventory for anticipated future production and sales. Don’t rely on prior norms.
  • Analyze the performance of all inventory and sell slow moving or excess inventory – focus on ineligible inventory if applicable.
• Actively manage your vendors:
  • Keep a close eye on new price increases and push back on vendors when changes appear excessive. Consider switching vendors when necessary.
  • Diversify your vendor base to reduce risk and give you more negotiating power.
  • Gradually slow payments to existing vendors to obtain additional “free” credit.
• Identify non-productive or non-core tangible assets and sell those to raise funds. These could include real estate, vehicles, and machinery and equipment
• Temporarily delay or reduce non-core capital expenditures.
• Review your existing debt and costs of borrowing:  
  • Consider refinancing variable rate debt and/or negotiating the timing and amounts of scheduled principal payments.
  • Establish a line of credit – it’s good to have an open credit facility available in advance of need.  
• Consider raising new equity or owner capital so that a rainy-day fund is available.

Improve profitability

While cash and liquidity are critical, it is vital that businesses look for ways to improve their operations to either reduce losses or optimize profitability. This starts with gaining a clear picture of performance and areas of opportunity, including:

• Prepare or update near-term forecasts (i.e., 13-week cash flow) and longer-term forecasts (i.e., rolling 12-month forecast) to provide the visibility needed to make informed decisions.  Revise the assumptions on a regular basis to help ensure they provide a real-time road map.
• Review every line-item expense and reduce or eliminate non-core expenses. This includes cost of goods sold; payroll; selling, general, and administrative costs; and discretionary expenditures. You should also review all contracts in place.
• Implement tight controls with a clear approval process for incurring new costs – avoid “expense creep”.
• Suspend or reduce non-core research and development projects.
• Divest or close loss-making locations, units, product lines, or individual SKU’s. Prepare an analysis looking at each segment and sort by profitability from highest to lowest – many times this provides new information that will guide these critical decisions.
• Review customer margins and implement targeted price increases based on the price elasticity of the products or services; in an inflationary environment, price increases are often easier to implement. Consider culling low margin customers.

These initiatives should be continually reviewed, and any changes implemented in real time. Companies that are more agile will likely better navigate through challenging economic times.

Reduce risk

There are factors that can quickly derail an otherwise healthy business so it’s important that business leaders identify areas of risk and look for ways to mitigate those risks. Areas to consider include:

• Analyze any pockets of customer concentration and look for ways to diversify. Pay particular attention to the financial performance of these customers – look beyond the four walls of your business for any warning signs that these customers, or the industries in which they operate, may be exhibiting.
• Look for ways to diversify any significant vendor, geographic, or currency concentrations that might contribute to your organization’s risk.
• Solidify your core team of employees. This doesn’t necessarily mean improving benefits or compensation but rather engage in open and honest communication to build a sense of togetherness that keeps your employees onboard during difficult times. 
  • Communicate well with team members as you navigate through challenges – employees often assume the worst.
  • Solicit feedback and ideas from the team on ways to improve profitability and conserve cash.
• Analyze any investments and consider reducing exposure to those that are risky or where failure or non-performance could have an outsized impact.

The professionals at CohnReznick are experienced at helping businesses of all shapes and sizes – and across all industries – weather approaching storms by analyzing the business drivers, strategizing on where improvements can be made, and executing on the tactics necessary across all areas of the business. 

Contact

Antony Walker, Principal, Financial Modeling & Decision Analytics Practice, Restructuring and Dispute Resolution Practice

617.478.9471

Chase Crosby, Associate, Restructuring and Dispute Resolution Practice

914.922.2157