Tag Archive: structure

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

   September 19, 2024 12:00 pm Leave a Comment

   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

2. Questions for 2022 Pt. 3: Cost Structure and Expenses

   March 2, 2022 11:00 am Leave a Comment

   This week, we’ll further explore the pressing need to review cost structures and all major business expenses in light of how business has changed (and will never go back to how it was pre-pandemic).

   What we already know:

   Once again, let’s take what we know about 2022, and then apply it to the question:

   • Some jobs and activities will always be in-person, and some organizations now feel confident enough to mandate returns to the office. However, remote-working has become a fact of life during the pandemic, and many organizations and people may choose not to return to their old in-person, in-office schedules and ways of working.
   • Business travel expenditures are still radically below pre-pandemic levels. And yet, most organizations have found ways to overcome travel limitations to their business development, operational management, and delivery activities in the short to mid-term.
   • It’s too early to fully know what the future of the office and the commercial real estate market is, but it’s likely that many organizations’ future office space and design needs will be different (both during and after the pandemic). Warehousing and other real estate needs may also be different moving forward.

   Great, but so what?

   First off, have you re-evaluated your real-estate needs versus your current real-estate footprint, given how business has changed and how future requirements may be different in the future?

   Real estate costs (including rent, utilities, facilities, and maintenance) can be a significant expense in many businesses. If future needs translate to the need for less office space, what are you doing to realize these potential cost savings? Equally, if your real estate needs will be different, are you budgeting for any required capital investment, such as for physical updates to office spaces?

   Another outcome of the pandemic is a record demand for warehousing and fulfillment center properties, and other logistics related real estate. So, even if your office space needs haven’t changed, what about these kinds of needs? Rather than offering an expense reduction opportunity, this might even be another area of rapidly increasing (potentially spiraling) business expense that deserves further analysis and action to bring it under greater control.

   Secondly, have you adequately and effectively reallocated budgets previously allocated to business travel? Moreover, have you considered whether your organization will return to previous levels of spending after the pandemic?

   Reduced business travel has not reduced the need for facetime with customers, colleagues, and vendors. However, the fact that most organizations have managed so well despite less travel does suggest that returning to previous spending levels may not be necessary. Equally, even if spend can’t (or shouldn’t) be reduced, how is it going to be reallocated to ensure business results and ROI if old travel activities (conferences, junkets, etc.) are going to be less prevalent?

   Thirdly, collaboration tools such as Zoom, Microsoft Teams, and Google Meetings have improved significantly in the last few years, as has their utilization by many organizations. Gaps and opportunities still exist, however. Has your organization fully accounted for the likely hardware, software, and other financial and capital investment implications of the increased usage of IT collaboration tools?

   Some of these incremental costs may already be obvious and/or known, but some may be less so. As examples:

   • Giving employees regular home office “stipends” for equipment costs is becoming more common. Should you be doing this, and how should you reduce corporate office expenses to offset?
   • Providing the same hands-on hardware and technology support employees are used to in a corporate setting is harder and more expensive in a remote work setting.
   • Will a prolonged increase in remote working have subsequent bandwidth, licensing, hardware, and infrastructure implications (and if so, what are the financial implications)?

   If you haven’t already, now is the time to more deeply review the longer-term impact of the pandemic on your IT organization and infrastructure, and how this could translate to your financial bottom line.

   Finally, we’ve mentioned in previous posts that worker shortages (translating into higher labor costs) have been another consequence of the pandemic’s impact on cost structures. Reviewing labor costs should be another priority for most businesses, but this topic deserves its own deep dive and will be the topic of the next post in this series.

   Conclusions

   Changes in how many organizations do business, including the increase in remote work and reductions in business travel, offer opportunities to re-evaluate cost structures and business expenses. These changes also highlight the need to identify and evaluate future financial implications. Core Catalysts regularly helps clients assess financial and operational efficiency and effectiveness to understand and optimize business operations and cost structure. We’ve also helped multiple customers optimize their IT strategies and infrastructure to match today’s changing environment. If you believe we could help your organization with this, why not reach out to us and schedule a call?

   Thanks once again for reading and please share any thoughts or comments you have. We’ll see you again in two weeks for the final post in the series, which will cover the question of business automation during and after the pandemic.

   – Mark Jacobs, Client Service & Delivery