The upcoming debt “maturity wall”

High interest rates and other borrowing costs continue to rattle businesses in all sectors of the US economy. With refinancing also becoming harder and more costly as much of the debt taken on during the pandemic (at lower rates) rapidly matures, there are fears of an upcoming debt “maturity wall” that will depress productivity and business performance.

To avoid your own “debt maturity wall,” timing is key: businesses should be looking for productivity improvements, cost-takeout opportunities, and cash-flow strategies at least six to nine months ahead of when they foresee debt service challenges starting to “hit.”

Unfortunately, many businesses can no longer rely on the benchmarks, expectations, and metrics they’ve used to assess their businesses in the past: EBITDA (earnings before interest, taxes, depreciation, and amortization) is not always an accurate reflection of a company’s health, especially when it comes to debt payments.

While the old ways of measuring the health of your business may be changing, one thing has not: a focus on rigorous cash management remains key to staying ahead on debt service.

So how should you be managing debt in today’s volatile economy, and looking ahead to try and proactively prepare and avoid issues? Below we outline five best practices to manage cash, cut costs, and stay afloat as debt comes due.

Build a stronger cash-flow model

As debt servicing adds strain to many businesses, it’s more important than ever that they have a comprehensive, closely managed cash-flow model to understand the real implications of refinancing on their balance sheets. Most organizations simply rely on financial assumptions and forecasts rather than a cash-flow model built on true sources (i.e., the full variety of revenue streams) and uses (like payroll, vendor payments, rent, etc.). The model should factor in timing of cash in-flows and out-flows, as well as reserve requirements where applicable.

Understand how to stretch your cash management cycle

 With a proper cash-flow model in place, businesses can find smart ways to stretch their cash management cycles (i.e., understanding when you’re receiving cash and when you owe cash so that you can extend those timelines).

On the payable side, this might involve negotiating new terms with vendors to better align payables with receivables.

On the receivable side, consider how well you are managing the payment terms and credit lines of your customers, make improvements where necessary, and also ensure you are adequately managing (aging) accounts receivables.

Think about the cash impact of inventory

Many businesses have some form of inventory. It is vital that you understand how quickly inventory is moving so you are not paying for anything that is lingering or aging (and declining in value versus your carrying costs).

This requires digging into the details. For instance:

• What are your fast-moving items?
• How can you rebalance your buys and measure inventory, both from a return on investment (margin and profit) perspective, and with regard to how quickly it can be converted into cash?
• What are the “hard” costs (i.e., dollars and cents) and “soft” costs (i.e., opportunity costs) of carrying too much (or too little) inventory, and how can these be mitigated?

While doing your analysis, segment inventory performance by product types (i.e., core products versus fringe offerings), as well as by channels, then place bets on proven products and customers so that you don’t have inventory tied up in low-performing areas.

Companies without inventory discipline may struggle with proactively managing aged stocks. In many cases, this inventory may not be tracked diligently, or when companies do track it, assessments may not accurately reflect the inventory’s carrying costs, including cost of working capital. Hesitation to manage aged inventory may stem from potential impacts to the borrowing base for asset-based loans and/or the reporting of merchandise margins.

Mistakes will still happen, which is why it is critical to also have end-of-life discipline and processes in place for exiting excess inventory in a timely manner. Do you already have these in place? If not, develop them ASAP!

Reassess cost structures (and tie them to healthy margins)

If you are concerned about debt service, now may be the time to undertake a thorough review of your cost structures, including general and administrative expenses, indirect spend, and costs of goods sold (COGS).

We always recommend starting out with an “80/20” approach in a “first pass” review, focusing on the large and important line items (80% of expenses), where identified reductions could make a meaningful impact on the bottom line (helping with debt service). We then recommend doing a second pass, digging deep into the “20%” (which typically covers more discretionary items), where it may be easier to identify reductions, but those reductions might have less of a bottom-line impact, and might have other impacts (on long-term growth and sustainability) that may outweigh the benefits.

When was the last time your company did a similar “root and branch” cost structure review? Has your company engaged in a competitive bidding process (for both direct and indirect spend) in recent years? If your answer is either “I don’t know” or “not for quite a while,” then now might be the time!

But please remember: exercises like this won’t lead to efficiencies if done in siloes; leaders across departments need to be involved.

Focus on operational improvements to fund growth, not borrowing

Even if a company is under financial pressure, it is vital that they continue to make investments in their businesses, products / service offerings, and technology to stay competitive.

But as long as interest rates remain high, operational improvements resulting in better productivity should be explored as a means to fund these investments and reduce the need for taking on more debt. When you do make investments, be sure to consider the impact on cash flow.

Conclusions

Money = Time, Time = Options.

Bankruptcies are on the uptick in many sectors of the economy, and debts can’t be refinanced forever. The old ways of measuring the health of your business are also transforming. In today’s market, rigorous cash management is key.

Use the above strategies to understand where you’re at now, so that you have time and capital to make necessary adjustments before it’s too late. The closer you get to potential default, the fewer tools you’ll have in your arsenal to prevent it.

If you would like some help with all this, contact Core Catalysts. With deep expertise and a team of very experienced “hands-on” practitioners, we can quickly assess where you might have opportunities, identify the best paths forward, and assist you in implementing and executing against these (and other) best practices.

–Mark Jacobs, Client Service and Delivery