Moving from Crisis Management to Recovery

Cash planning starts with a 13 week rolling cash forecast, designed to answer three questions:

1. Do I run out of cash and when?
2. How much cash is required?
3. For how long will this be needed?

Since no one has a crystal ball, we recommend developing a forecast based on a stressed revenue forecast and conservative expenditures. During this process, ideas must be developed regarding possible sources of cash inflows and opportunities to defer or eliminate expenditures. Specific areas to explore for cash generation and preservation are:

External Sources of cash

1. Drawdown of existing loan facilities
2. New loan proceeds
3. Governmental COVID-19 relief programs; e.g. SBA loans, CARES Act, Other state and local assistance.
4. Equity or structured equity proceeds
5. Private Equity minority investment or part of a planned “creeping acquisition”

Internal Sources of cash

1. Acceleration of accounts receivable collections and dynamic assessment of associated credit risk
2. Sale of underutilized or idled assets
3. Inventory reduction
4. Payroll reduction through benefits reductions, wage cuts, furloughs, or headcount eliminations
5. Extension of vendor terms for payment
6. Renegotiation/moratorium of long-term fixed payment obligations
7. Shutdown of plants and offices
8. Alignment of cost structure with depressed revenue base

Once immediate measures have been taken to secure liquidity, a plan to sustain survival should be executed until the recovery phase is feasible. The plan should have at least 3 components and the following actions:

1. Preserve Revenues:
   • Identify potential revenue implications of the crisis by market and customer and review go-to-market approach
   • Identify changes in revenue potential (given the crisis, some markets are becoming more attractive than others while others with good growth prospects pre-crisis are now on hold)
   • Engage with key customers to understand situation, needs, risks and communicate company plan for business continuity
2. “Do more with less” (Cost Discipline Initiative)
   • Managing costs efficiently is easier when the entire organization is on board. A company-wide initiative to manage costs as efficiently as possible should be put in place while further identifying cost-reduction opportunities without affecting the business continuity required to execute the revenue plan
   • The “Do more with less Initiative” must at least have the following components:
   • Laser focused discipline in procurement
   • X-ray the employee base and determine prioritized list of critical employees in case of a need for further labor reduction, optimizing both volume (# of FTE’s) and cost levels (wages + benefits)
   • Optimize discretionary spend (contractors, marketing spend etc.)
3. Continue Managing Cash and Invested Capital prudently
   • Eliminate non-critical uses of cash
   • Continue managing and looking for opportunities to reduce cash conversion cycle optimizing all available levers (Levels and terms for Receivables, Payables and Inventory)
   • Review investment portfolio and postpone non-priority capital expenditures

As plans are developed and more visibility is obtained, it is critical that communications take place with all constituencies of the business. In addition, it is also critical to install a Crisis Response Command Center that meets daily to address all parts of the plan. During times of physical separation, it is essential to go beyond the standard visual conference call, teams must use real virtual collaboration tools that enable visual dynamic problem solving and real-time management of tasks. EFESO has been facilitating teams using these types of tools for several years with great success.

Employees

• Leadership must be displayed
• Be realistic, but always encourage
• Provide a decisive plan forward
• Explain the part that each person must play
• Have a forum to obtain feedback and concerns
• Ask for ideas

Management

• Assign specific tasks related to conservation and determining sources of cash
• Have daily meetings to touch base and determine progress
• Hold individuals accountable for task execution
• Review important metrics in a dashboard format on a daily, weekly and monthly basis
• Communicate changes required because of new information obtained

Customers

• Stay in touch and continue to market with minimal expense to encourage a quick return
• Use prompt or early payment discounts to encourage quick collections of cash
• Provide comfort that the business will survive and is prepared for fast escalation of activity when conditions improve

Vendors

• Investigate inventory return rights to conserve cash expenditure for accounts payable
• Seek extended payment terms in return for price increases related to future purchases
• Obtain information regarding the financial viability of current vendors to determine whether replacement vendors will be needed
• Explain the company’s activities to withstand the crisis and remain financially viable

Lenders

• Start the dialogue immediately regarding the actions the company is taking
• Communicate frequent status reports on the results of actions taken
• Discuss issues regarding forbearance, covenant relief, and availability of additional funding for restructuring actions that will enhance financial viability

Owners (Board of Directors)

• Communicate on a scheduled basis, the survival and recovery plans and results to assure that there is alignment with management
• Consider increasing the frequency of formal meetings
• Enlist the assistance of Owners and Board members in finding sources of both debt and equity capital
• Provide timely and complete information to allow for fiduciary requirements to be met by Board Members and Owners

Once survival of the business is secured, and some predictability of future business activity is possible, the business must adapt to a scale that is affordable under projections of revenue and commercial activity. Under the current circumstances, when the COVID-19 crisis is over or at least manageable, businesses will be able to move forward. It is likely that the return to the level of pre-existing activity will take months, if not years. When this occurs, a complete restructuring of the business may be required.

The focus will then be on profitability as well as cash/liquidity management. A proper relationship must be established in the P&L components, matching expenses against expected revenues. This may require structural changes along with commercial and operational improvements.

Some of the restructuring activities that may be required during the recovery period are:

Structural Review

• Revision of strategy (where should we continue to play and how?)
• Product profitability analysis resulting in escalation or discontinuance of some products or services
• Disposition of non-performing business segments
• Footprint reduction
• Review target setting and business objectives

Commercial Review

• Review of target market and customer segments
• Revision of customer contract provisions
• Optimize Marketing plans

Operational Review

• Operational improvements to enhance competitive cost position
• Additional reductions in employment levels
• Redefining acceptable levels of working capital

Financing Review

• Refinancing of debt
• Optimization of capital structure

Restructuring and business model definition is very complex in both planning and execution. Consideration should be given to retaining legal, accounting, business and restructuring advisors. Large companies might have in-house resources to handle the complexity, but mid-market companies will be challenged.