Working Capital: Know Your Runway
Stepping into a restructuring situation is always tense. Management feels the strain of prolonged ‘fire drill’ mode, creditors and equity investors are concerned, vocal and requesting information from the company executives about operations, cash flow and their resolution plans. Meanwhile, morale is low among employees who know things aren’t right, so rumors and concerns run rampant throughout the company.
All of this turmoil can be a lot to absorb in a short period of time.
When we step into restructuring scenarios, one of the first things we do is to try to simplify things by asking these questions:
How much gas(cash) is left in the tank?
What are the accurate balances of the company’s other working capital balances today?
What is the working capital need going to be as things move forward?
It is best practice that businesses should examine these criteria on a weekly or monthly basis — regardless of how they are doing.
But that is not always the case. While many companies have a handle on their cash balances, insofar as there are sufficient funds to make payroll, etc., they rarely have answers about their overall working capital and events that will impact working capital going forward. A few plausible explanations for a lack of insight into working capital are:
Diverted attention: Management has their heads down trying to fix the organization’s most pressing concerns. These issues range from labor shortages or shrinking margins caused by increased material costs, to unhappy vendors with seemingly ignored invoices, or managing customers to try to grow sales — just to name a few.
Conflict avoidance: In a restructure, the issue with a cash plan — and tracking working capital — is that it is headed in the wrong direction. As long as major issues (such as the next payroll) are solved for, the rest gets put off for another day.
Inadequate reporting: Financial reporting may be an issue because management has never gotten up-to-date information on working capital. If a company is operating with financials that are 30 or 45 days old on a regular basis (i.e. they are closing the books in January and March, and so on), management is essentially flying blind.
In any corporate workout, it is critical to develop a plan of restructure. Typically, that involves two things: establishing working capital on week one, and then building a rolling cash plan that tracks working capital for the coming weeks — projected cash in and cash out, available financing, collateral, etc.
Establishing a working capital plan will immediately identify whether a business has months, weeks, or days left for unimpeded operations. When that timeline information is shared with management, it brings immediate and direct clarity on priorities and next steps. Then, when that same timeline information is shared with select creditors, such as the senior secured lender, it can make their next course of action clear. This working capital plan process is a scary prospect, but transparency and clarity are paramount to getting buy-in from all the relevant parties moving forward.
Restructuring engagements are delicate; at Turning Point we try to approach each scenario with humility and conviction. We are cognizant of the accomplishments of the people who built and grew these companies. But we must be resolute in laying out the path towards improved cash flow and profitability.
In short, the first step in our restructuring process is an accurate measurement of working capital. Our team needs a rolling 13-week cash flow, and a clear understanding of how your company got there. Only then can we begin to plan the way forward for you and monitor the progress along the way.