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WHAT WE DO

THE ISSUE

Businesses may face cash flow difficulties from several factors, which may force business management to focus too much on restoring cash flow, and thereby ignoring crucial business operations. Potential causes of cash flow difficulties include:• Economic downturns• Interest rate increases• Decreases in sales due to market conditions or competition• Collection problems• Carrying cost of non-productive assets• Inability of management to prepare for a crisis.

THE EFFECTS OF THE ISSUE

When cash flow shortages first arise, typical management may be forced to react to that need without focusing on the long range effects. Putting off one bill to pay another seems at first a simple solution to the problem and satisfies the immediate need. Initially, management thinks very little of the problem, reacts on a simple basis, expecting that the problem is short-lived. Most Management do not realize the long term effects of such actions. Accounts payable are no longer paid on a timely basis, bank payments become late, tax payments are delayed, payrolls are not timely made, and the resulting catch up becomes more and more difficult. Suddenly, the owner is deluged with letters, telephone calls, demands from vendors, requests for COD payment, loss of credit standing, and even serious employee morale problems. More importantly, management can no longer effectively manage the day to-day business operations, and face personal exhaustion and a loss of morale. Before long, management is pre-occupied with daily crises. Unreasonable demands are made, and reactions are based on merely keeping the business alive. The business is no longer operated in a planned method for steady growth and expansion. Lastly, employees are left in the dark and find it difficult to function in their positions.

OPTIONS AVAILABLE

The available options for management start to narrow. How does one plan and operate the business in the face of disaster and daily crises? How does one keep daily operations flowing with limited cash? There are numerous strategies available which include debt restructuring, finding new sources of capital, simply doing nothing with the hope that revenues will increase, selling the business at a loss, reducing expenses, or finding an asset to sell that generates cash or reduces debt and periodic payment of obligations.

PLAN OF ACTION

The best move for management is to step back, meet with its business professional advisors, develop a plan to curb the daily cash demands, and program the payment of debts and bills. But, without the ability to generate cash, this becomes a difficult task, which can lead to legal ramifications against the business. In the best situation, a business may find that it has valuable non-income producing assets that could create a solid cash reserve and reduce its cash outflow. The most significant of such assets, if available, may be the owned real estate in which the business operates.

While it is true that, after a sale to an outside company, rents still need to be paid in order to operate in the space, the elimination of payments for mortgages and taxes may be offset by the value realized on the sale of such assets. This would be particularly true, for example, if the business had borrowed against the real estate and had fallen behind in the payment of its debt. The best result then may be to secure the services of a competent real estate broker to list and sell the real estate. This can even be done in the face of adverse circumstances, including a threatened foreclosure or forced Chapter 11 Bankruptcy Proceeding. Additionally, management can refinance the real estate if there is sufficient equity and take some cash out of the real estate to pay down high interest debt, purchase new inventory to support sales or to support turn around strategies.

INTENDED RESULTS

The intended result of a planned action to sell or refinance non-productive assets may have the effect of reducing the monthly cash outflow of the business, allowing the business to make a Plan with its creditors for the orderly payment of its debts, create new arrangements with vendors for on going merchandise needs, and, finally, to allow management and key employees to effectively focus again on the daily business needs and corporate growth.

EXAMPLE

Company A, a manufacturing company, had for years increased annual revenues, reduced non-core expenses and effected nominal, but steady cash flow increases. Company A rents its location from the Company or its owners who own the real estate in a General Partnership. Monthly rental (which included taxes, maintenance and insurance) covered the mortgage on the real estate. Company A occupied approximately two-thirds of the property, and the General Partnership had leased out the remainder. When the remaining one-third tenant moved from the premises and the General Partnership failed to locate another tenant, it suddenly found it necessary to increase the rent paid by Company A in order to keep mortgage payments current.

The increased cash drain on Company A was like a downhill spiral. Company A missed vendor and tax payments, fell behind in payroll, could not deliver merchandise to its customers, and saw its sales drop dramatically. At the same time, the General partnership fell behind in its mortgage payments. Company A was forced into a Chapter 11 Bankruptcy Proceeding and the General Partnership faced foreclosure on the real estate. Company A and the General Partnership then engaged a professional firm to guide it in a process of staving off foreclosure, aiding Company A in coming out of the Chapter 11, and helping with ongoing operations.

The Plan put in place was to create the sale of the real estate, create additional cash for the business, reduce the cash out flow and concentrate on business operations and marketing. A sale of the real estate was accomplished coupled with a lease to Company A which included a reduction in the size of the premises and a reasonable amount of annual rental payments. More importantly, the lease to Company A created a six month moratorium on rental payments, effectively creating cash for Company A. At the same time, Company A created a Plan for the payment of debt so that the cash flow crises could be avoided. This also included a short deferral period for the commencement of vendor payments. The sale of the real estate further enabled the General Partnership to pay-off the debts on the property and to eliminatethe cash drain on Company A.

The result of the above turn-around strategy enabled management to again focus on growth and its business operations.

CONCLUSION

The ability of business management to devote fulltime and attention to daily operations and internal growth issues is most vital for the success and future growth of the business. Distractions from that time are very costly, consume time in areas that management should avoid, and are major distractions and interruptions to the daily business flow. Time and again there are case studies demonstrating the disastrous effects to businesses when distractions occur. The success of management to effectively oversee its business during stressful periods depends upon the ability of management to delegate responsibility and to have the capacity to deal with the stressful demands. Management must wisely choose not only staff members, but also outside advisors who have the knowledge and the skill sets that match the project. The example given here is one wherein management did choose a capable advisor who was able to sort through the issues, create legal barriers to business destruction, and develop the means by which a sale of non-incoming producing property was utilized to save the business, inject working cash in the business, and generate the time for management to effectively operate and manage the business. Growth of the business then became possible through the guidance of management.

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