“To survive in the long-term – one must survive in the short-term”.
To be followed by the maxim which is perennially true: “Cash is King”.
Your Default Alive Cash Plan – Maintain Cash in – Slow Cash Out.
- Investment firms and corporates will prioritise directing cash to their existing portfolio which will require additional cash support over the coming months. As a result, investment activity is forecast to slow down significantly. All Venture Capital firms will require current and prospective portfolio companies to re-forecast or re-budget based on their company's exposure to the Covid-19 crisis.
- Valuation comparables from the stock market are a preferred valuation technique – in its current volatile state investors are likely to delay any commitment whilst they contemplate grounds for a reprice based on contraction of comparables coupled with forecast changes for the coming 12 months.
- The Venture Capital world is relationship-driven with investors normally requiring face to face meetings to secure the investment. The more complex the deal structure and thus legal agreements, the longer the decision timeline to be expected.
- Corporates will also delay investment activity such as rights issues, IPOs or debt raises whilst leaders assess the ongoing impact of uncertain demand and supply in their industry. This will also have a drop-down effect on their suppliers.
2. Debt facilities will be reassessed
- Existing debt covenants will come under pressure as revenue will slow at a different rate to costs, particularly given many costs are on a fixed basis.
- Banks and debt firms will look at a reprice/rethink on deal negotiations in motion or coming up for renewal. Forecast models for new debt will be revised, slowing down deal activity or leading to harsher terms to reflect the new risk environment.
3. Consumer markets will polarise
- People are working from home and socialising less which will have a direct impact on industries such as retail, hospitality, entertainment and travel.
- DTC (Direct to Consumer) businesses that are unable to react and adapt quickly are at serious risk; B2B will also suffer with the greatest effect felt on winning new business and renewals.
- As people fear for their jobs – the uncertainty will cause them to tighten their belts on discretionary spend with only the most essential of items being purchased.
Over the coming weeks, we will analyse other effects such as supply chain risks, labour supply shortages & currency volatility.
The cash-review process should be:
1: Priority analysis regarding the survivability of your company:
Review a worst-case cash scenario for the next 6 months:
- Divide your current Cash Balance/Running costs per month (less guaranteed income) – if the calculation shows less than six months the Board needs to be alerted and a conservation plan developed. Note this is not Burn - your burn is about to change, trust us, as you need to assume your revenue will take a hit. We will call it Running costs less guaranteed income.
- There is no time here to spend 2-3 weeks re-cutting a budget in its entirety so focus on a “quick and dirty” in the first instance - the next payment run even.
- With your sales team run a worst-case revenue hit scenario over six weeks, four months and nine months and run some sensitivity analysis on key clients and sectors (such as DTC - uncertain here what will happen, catering, hospitality and events, retail, tourism, advertising).
- Review current debt facilities and potential defaults, current outstanding debtor collections and potential defaults (which may trigger a default on factoring facilities), and review on financing about to take place and decide if it will still close.
Feed the above into a weekly cash model and run some sensitivities – this model does not need to be sophisticated in the first instance – a simple cash in/out weekly model will suffice.
2. Tips on cash conservation for your company:
1. Harvest and maintain cash receipts:
(a) Debtor book review – defaults here could be a contagion for any factoring arrangements in place. A debt default can have a ripple effect which can put your survival in jeopardy quickly. Get on top of it early and talk to those debtors you feel are default risks (certain industry sectors will be at more risk than others - smaller clients will be at more risk) – you cannot afford lack of payment – there are other things that can be done here to encourage payment which we can review again i.e. you may need to present better deals to collect.
(b) Maintain current customers – if you provide a service perceived as non-essential you will come under pressure. It is always cheaper to keep a client than win a new one and so now is the time to offer discounted renewals and other deals
(c) Winning new business – now is not the time to offer deals. Close any product lines which are loss-leading or burning cash and won’t turn positive in two months.
(d) Turn old inventory or any inventory into cash – even at a loss. Cash is more important than profits right now.
2. Conserve cash by delaying tax payments if needed –Government announcements relay a commitment to supporting businesses who are struggling with new plans in place for VAT and Income Tax. Contact HMRC and ask for “Time to Pay” We recommend taking advantage of this at the earliest opportunity.
3. Press for payment plans with larger suppliers who are likely to be able to better weather cash flow difficulties than you. As a trade, offer a longer-term contract or a price increase in six months for example.
4. Analyse all the services you buy in and decide which are Business Critical. You are now looking at your Variable Costs however you also have to look at what Fixed Costs can go variable such as moving permanent staff to cheaper contracts. Check what your contract terms and cancellation rights are - we also recommend exploring deferred or lower price options which you might be also offering as discussed in Point 1.
5. Staff – review contract/temporary staff and decide which are absolutely critical and whether a lower base can be used for a period; the duration of the contract can be increased as compensation. Decide which permanent staff are needed for minimum service delivery– companies have previously found innovative ways to reduce salary cost by requiring all employees (from CEO to Junior) to take unpaid leave at pre-agreed periods during the year or reducing workdays from 5 to 3. We are at the beginning of a period of uncharted territory and so we recommend close consultation with your employees to encourage collective buy-in.
6. Development projects with no positive impact on revenue in the next three months should be postponed or cancelled immediately. Investment priorities must be aligned with retaining or generating new revenues quickly - which will be difficult thus - cut.
7. Recruitment should be focused on roles that are essential to maintaining or building new business for the next three months i.e. not many.
8. Marketing spend must show a considerable return or be stopped immediately in the current environment with consumers spending less. Travel and other services, for example, will have little to no chance of return. If you run an eCommerce business, it may be a good time to press through and not cut back. Analysis of marketing return ratios should be carried out on a daily basis with a view to cutting.
9. Debt holidays for principal and interest should be taken wherever available and at the earliest opportunity. Whether you are using senior, mezzanine, venture debt, factoring or inventory financing, start all conversations early in order to have the best chance of restructuring. Expect all providers to pressure you towards your equity partners and use this as an opportunity to bring all parties to the table where the best deal is likely to be agreed. We strongly recommend not to leave this to the last minute.
10. Ask your bank for an extension if you have a current overdraft. They are unlikely to be in agreement however do not take this off the table.
11. MOST importantly we recommend you check with your current equity investors on their options for a bridge ASAP. We recommend using a system of convertibles structured to convert in an absolute time period between a predetermined floor and ceiling valuation, otherwise, you may be just delaying the pain. It is also worth highlighting that any investors will require your tightest ever weekly cash plan immediately.
3. Crucially businesses need to act now, however doing so with a cool head with a view that this will pass and not throw the baby out with the bathwater. This is going to be a tough time and tough decisions will be needed but this will pay dividends in the long run.
This is the first of several articles that the Whitelake Team will disseminate over the coming weeks, the next of which will summarise cur Governmental assistance schemes in place. If you would like to stay informed, please reach out directly or make a note in the comment section. We offer a free call for guidance to anyone who wishes where we can.
John Rowland, CEO/Managing Director White Lake (email@example.com)
Jamie Bowler, Associate Director (firstname.lastname@example.org)
If you need help on any of the above please contract us. We have executed on all these areas successfully. We are a team of ex-VCs who specialise in assisting PE/VC funds as Consultant CFOs with portfolio companies on cash management, restructuring, corporate finance & financial function management, controls and reporting.