Tag Archive: debt

  1. Technology Debt – What Is It, Do You Have It, and Why You Need to Address It

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    Most, if not all, businesses today rely on IT systems of one type or another to operate.

    In an ideal world, these will be modern IT systems that require minimal and predictable effort to maintain and operate in the same capacity as when it was first commissioned.

    This does not mean there will be zero costs to maintain a well-operating system.

    • If updates are installed, hardware is kept in good working order, backups are regularly made, and performance is monitored, your system will function as expected, with costs related to these activities costs typically a solid / high return IT investment
    • If you have chosen the right IT system for your needs, configured it correctly, and have the right blend of in-house and external resourcing to maintain it (see above), it should perform as needed, cost effectively, for a sustained period of time.

    Combined, you should be empowered to focus on managing and growing your company, with your IT systems acting as enabling tools (versus constraints).

    Unfortunately, none of us live in an ideal world. Most of us must deal with some mix of old, aging, or outdated IT applications that are utilized for core business processes. Even those of us who have been able to migrate to Cloud and SaaS platforms often live in a world where, individually, these applications are great, but implementation was approached in a siloed way, meaning there is little to no integration between core systems, making seamless data sharing and automation an unrealized promise.

    Combine this with a lack of in-house IT resources to maintain or update system configurations (the people who implemented the system no longer work for you, you don’t have enough people who “know” or understand the systems well enough, or customizations and code bases have somehow become unmanageable, etc.) and you have “technology debt.”

    What this means is that, as technology, business needs, and your organization evolve over time, relative IT system performance degrades (e.g., the system gets slower or harder to use, benefits delivered decline, the system doesn’t have all the “features” etc. you want or now need, it is hard / slow / impossible to make changes, and issues with “capability fit” to current business needs and processes emerge) and / or the effort and cost required to operate, maintain, and enhance your IT systems grows.

    Does any of this sound familiar?

    Unfortunately, all too often, addressing technology debt (i.e., implementing modernized IT systems) is deferred until “pain” becomes too acute or unbearable to ignore, with IT system issues either hampering revenue growth, profitability, or operational efficiency and effectiveness, either as an organization, and / or relative to your competition.

    Letting technology debt get so bad that the rationale for modernization is “we have to” is a sorry state of affairs, based on misconceptions and fear over costs, difficulty to implement, and a general aversion to change. The reality is that, while IT system modernization is seldom “easy”, the goal is to enable performance improvement and the end result of IT modernization done well is typically a reduction in total cost of ownership / operation and meaningful returns on the investments made, both financially and operationally, with any change to business processes viewed as overwhelmingly positive over the medium to long term.

    Still, if you believe or suspect that aspects of your IT systems are holding your business back, it is still hard to know where to start: your IT department are probably well able to explain what the issues are, but less able to articulate how to solve them moving forward, because their focus and expertise is typically business continuity versus systems modernization.

    This is why Core Catalysts has developed a rapid and cost-effective IT assessment methodology that helps identify and diagnose IT issues, opportunities, and technology debt, and make recommendations on how to modernize systems cost effectively to deliver meaningful results.

    Over the course of hundreds of engagements, we have helped our clients reduce licensing and maintenance costs, update business processes, and improve profit margins, often leveraging modernized “Cloud” and “SaaS” solutions in targeted, thoughtful, and integrated ways to deliver enhanced business results.

    If you would like to find out more about our IT assessments and system modernization expertise, reach out to us today!

    –Mark Jacobs, Client Service and Delivery

  2. Staying Ahead on Debt Service: Focus on Cash Management and Cost Takeouts

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    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

  3. Still the Best Kept Secret in Kansas City…

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    We posted this several years ago and get reminded often from our clients and prospects that it is “spot on” with our message. This means it comes both from our experiences and our client feedback gathered over time – and you can check our work on that!

    Here is THE best kept secret in Kansas City for improving and growing your business. Core Catalysts is a management consulting company that has some of the best-handpicked minds in town.

    We have experiences across multiple industries and multiple disciplines. We are supported by tools and templates that are brought to bear and accelerate solutions that clients need. We are focused on making our clients successful. Making clients successful can take many forms, including:

    • Modernizing a major set of applications that are aged and costly to support – reducing “technology debt” and improving support for the end customers that use these applications at a price point well below other major consulting firms.
    • Process improvement of a back-office process that streamlines the Accounts Payable efforts, Invoicing accuracy, or Inventory Management to name just a few.
    • Program and project management of key business initiatives, like implementing a new core banking system in record time that enables the acquisition of more clients.
    • Providing some stability in leadership gaps on a flexible basis so that the company can recover from key issues in its staffing – objective, aggressive change leadership for significant business growth.
    • Assisting with the fast and accurate acquisitions of multiple business entities and then driving an integration plan that results in overall business value increases.
    • Facilitating the development of strategic plans that have clear executive buy in, actions, responsibilities, and metrics.
    • Assessment and identification of business issues that may not be apparent to the existing leadership teams; a fresh set of skilled eyes that can spot issues with low gross margins, sales effectiveness, branding issues, gaps between strategy and execution plans to name a few.
    • Development of clear action and implementation plans that can be used by the client’s existing team while training them along the way. Put simply, we teach our clients how to fish.

    So why is Core Catalysts the best kept secret? For several reasons: Our advertising and marketing budget is small (we keep our overhead rates low). We are humble mid-westerners not used to bragging to everyone about our successes, and many companies may think they can’t afford us, not knowing that paybacks on our services are typically astronomical. As a sales message, that’s understandably hard to believe – but we have decades’ worth of experience and client testimony to prove it!

    So give us a try, and more importantly, ask our clients to give you a sense of reality and comfort. We have many client success stories, ranging from the $50M clients to the multi-$Bs clients across multiple industries.

    —Jim Wadella, Owner/Founder