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Operating Like a Turnaround (Before You Have To) — Part 3

[Part Three in a three-part series discussing the benefits to healthy, profitable companies in taking a page from the turnaround management playbook.]

In our previous blogs, we discussed operational analysis and expansion planning as it pertains to unlocking capacity and growth. In this installation, we focus on the projection, timing and tracking of cash flows.

HOW CAN YOU HIT A TARGET IF YOU’RE AFRAID TO CREATE ONE?

The 13-week cash flow forecast is the industry standard for basic performance measurement in a turnaround situation. Every cash inflow and outflow is matched against projections, with variances (positive and negative) scrutinized for the underlying causes.  This tool provides an enhanced level of transparency into a company’s performance, which is at the same time crucial for management and demanded by creditors.

When applied to a healthy company, the 13-week cash flow forecast allows management enhanced clarity and transparency at a granular level. This can lead to quicker, more informed decision-making in both the core operations and expansion initiatives. This level of clarity, starting at the C-Suite, can be pushed down into the entire organization, unifying all manager-level employees with a common language.

The 13-week cash flow forecast can roll forward on a weekly or monthly basis, creating benchmarks for monthly tactical reviews and quarterly strategic reviews.  Essentially, it becomes the core tool to benchmark a company and its management against an agreed strategic operating plan, with factual data forcing accountability for performance.

IMPLEMENTATION & TRACKING

Tracking actual performance to projections is a powerful indicator for your business. It provides a crucial level of awareness, giving you the opportunity to detect problems, recognize strengths and evaluate initiatives. Without some form of tracking vs projections, you’re really on a road trip without a map: no destination and no evaluation of progress towards the same.

Cash inflow projections are based on detailed knowledge of your operational capacity, sales cycle and customer pipeline. They should reflect what you can realistically expect your system to generate: known customer demand, order backlog, production capacity, inventory, length of sales cycle – all these factors must be carefully considered in creating your revenue projections.

Remember that you’re not just projecting revenue – you’re anticipating when cash will actually hit your bank account and be available for use. Cash inflows that fall short of projections provide notice as to a host of potential issues, including operational/production, sales efficacy, customer demand and customer solvency (collections).

Alternatively, cash inflow actuals deviating substantially to the upside alert you issues such as market demand and “sweating” assets, potentially indicating the need for expansion and investment. In either case, deviations from projections can be given immediate attention rather than delaying or ignoring issues due to ignorance or untimely knowledge of them.

Cash outflows are created based on when you anticipate actual payment of expenses. Factors to be considered are escalations (think rent and inflation), anticipated equipment/asset purchases and hiring initiatives. If you pay expenses with a credit card, those payments should be considered cash outflows – money that has essentially left your bank account and is no longer available for use. Actual outflows that exceed projections could be an indication of a lack of grounded operating knowledge, inefficiencies, supply chain issues or a lack of proper controls.

TIMING & ALLOCATION

It’s also important to get the timing of cash flows right. Every business essentially matches cash inflows to outflows, with the goal of being able to meet obligations as they come due and to calculations of IRR. Cash that comes in later than expected can cause a lot of heartburn when outflow obligations materialize, leading to ad hoc cash management that diverts cash from other pre-planned activities. Cash flow mismatch also communicates to investors that you don’t have a solid grip on your cash management, eroding confidence in management and the business in general, potentially resulting in valuation discounts.

Projecting future cash balances allows you to plan for capital allocation and anticipate financing needs. Accurate cash flow forecasting shows lenders/investors/buyers AND current shareholders (including yourself) that your company is tightly run and it instills faith in your management acumen.

Perhaps most critically, a well-executed cash flow forecast creates a level of fact-based understanding of your company’s operations that can be used as benchmarks for accountability for you and all those in executive or management functions.

The bottom line is that as a business owner, you must have deep knowledge of how both cash and work flow through your business. Lack of visibility on either of these key aspects leaves you vulnerable to very unpleasant, yet very avoidable surprises.

Mark Taffet is CEO and Wolfgang Tsoutsouris a Managing Director at MAST Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies.

Securities Offered Through SPP Capital Partners, LLC. 550 Fifth Avenue, 12th Floor, New York, NY 10036 Member FINRA/SIPC

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Operating Like a Turnaround (Before You Have To) — Part 1

[Part One in a three-part series discussing the benefits to healthy, profitable companies in taking a page from the turnaround management playbook.] 

How & Where Are You Generating Profits?

Imagine running your company with a laser focus on where it is generating profit.  Imagine trimming or eliminating unprofitable functions, retaining only those aspects of the business that provide the best returns and opportunities for growth.

This is the discipline that turn-around professionals bring to troubled businesses.  This discipline, when applied to healthy companies, makes them even stronger. It rallies resources around the company’s core mission, manifesting profitable growth and allowing significant, retentive awards for the company’s key assets: its people.

Many companies have a great set of core products/services.  They have developed a competitive advantage in those offerings and understand the specific market subsegments that find value in their purchase.  These core activities create strong, sustainable profits.

But then arise the dual temptations of 1) “mission creep”: the expansion beyond these core offerings, and 2) “avatar creep”: marketing/selling to customers who do not perceive/receive the highest value from these products/services. These diversions start out innocently enough, often as tangential add-ons, but are borne not of true market demand, but from an inwardly focused culture.  These initiatives may appear to address customer/market needs, but often merely distract management from addressing growing internal problems. They add operational complexities, confuse both consumers and employees, and can ultimately lead to cultural friction and diminished financial performance.

A ”mission creep” example: a company offering a nascent, evolving technology finds that their  offering(s) are not performing exactly as anticipated or promised. Customers ask for supplementary or stop-gap services, which customer service staff tries to accommodate. Instead of confronting the core issues around product improvements, a spiral of ad hoc deliverables takes hold. This unsanctioned “sub-division” consumes the attention of your most valuable people, squeezing out bandwidth for critical “must-have” improvements which would more effectively improve customer satisfaction. This bandwidth shortage leads to more hiring, misaligned with the company’s core mission.  Before you know it, payroll has ballooned past the point of profitability without cementing core customer relationships.

An ”avatar creep” example: An industrial services company finds that a particular type of client receives very high value from its services. These clients are large, sophisticated, and their needs align precisely with the company’s services. In an effort to generate growth, the company markets to smaller, less sophisticated customers. While sales to these customers increase revenue, it is at far smaller margins. Customer acquisition and service costs increase, production assets are strained and customer service demands may skyrocket – all contributing to decreased profitability, and if left unchecked, a potential cash crunch.

Examples of how this looks when acted upon: a healthy restaurant group operating in multiple venues undertook a broad analysis of their portfolio. This analysis revealed underperformance in a distinct segment, which led to shuttering numerous locations. While revenue decreased, margins strengthened and bandwidth was unlocked, allowing them to double-down on their profitable core and pursue a new venue type with far stronger growth potential.

A profitable 3PL enterprise performed a granular review of their client base, which revealed that many of their customers were in fact unprofitable. This detailed analysis resulted in culling 60% of their clients, refocusing on their best clients, and increasing EBITDA margins from 5% to 16%. This allowed the company to explore additional services and expansions that will further serve their core customers and at stronger margins, positioning them to attract additional clients of similarly high value.

In short, when companies take a page from turnaround management, doing a deep dive into core competencies that match specific high-value customer demands and shedding margin dilutive activities, friction in product development / distribution is minimized and Sales & Marketing messaging is clarified. Costs are reduced, and while revenue may lag in the short-term, increased margins and customer satisfaction open the door to far greater, more profitable revenues in the future.

This also highlights the rigorous due diligence necessary to undertake expansion. It involves an examination of specific customer demands, how they match with the company’s capabilities and a robust buy/build analysis. Stay tuned for our next blog, which will address this in greater detail.

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Mark Taffet is CEO and Wolfgang Tsoutsouris a Managing Director at MAST Advisors, Inc., an M&A and strategic advisory firm focused on maximizing value for middle market companies.

Securities Offered Through SPP Capital Partners, LLC. 550 Fifth Avenue, 12th Floor, New York, NY 10036 Member FINRA/SIPC

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