Q&A: Keeping liquid and staying afloat

An interview with John Grivetti

7/15/2020
Q&A: Keeping liquid and staying afloat

Conserving and accessing capital has never been more important for corporate leaders as they scramble to fortify balance sheets in an upended, post-COVID-19 world.

Here John A. Grivetti III, partner in the Crowe advisory services group, talks to FEI Daily about how senior-level financial executives can keep cash on the books even as little is coming through the door.

 

FEI Daily: What do you think are the top three strategies that financial executives should employ when they’re trying to conserve cash in the current environment?

John Grivetti: There are many different levers that executives can pull to conserve cash. Each management team has to focus on the highest-priority options, which vary a little bit for each individual company or industry. However, a few are broadly used across most markets.

Number one, cut back on discretionary general and administrative expenses. Force management teams to justify every expenditure, including subscriptions, IT-related expenses, trade shows, training, and travel – not that there is any travel right now, but there will be in the future. Finding alternatives to travel is clearly something that every company has had to do, and it will be a while before the market reaches the pre-COVID-19 travel volume, if ever.

Second, evaluate your supply chain. Many companies have been forced to reconsider the supply chain because many vendors currently are not able to manufacture and deliver products. Companies in the current crisis have discovered the difficulties that sole sourcing can cause, so alternatives should be considered. International vendors, because of the logistical challenges, might no longer be the best and only option. As management teams analyze the situation, now is the time to consider changes that can improve operating margins in both the short and long terms.

An important aspect of evaluating a supply chain with a goal of preserving cash is prioritizing key vendors. Management should stretch the payment terms with any vendor not identified as a key vendor. If a vendor is not important for keeping a company operating in the short term, management has to pull that lever and say, “I’m going to put those suppliers out there a little bit longer, and we are going to pay just the key vendors on normal terms.”

Third – the option that often comes to mind first – is personnel changes. However, when evaluating personnel changes, keep in mind that just a few months ago, one of the biggest issues I heard from clients and targets was that lack of qualified personnel candidates was an impediment to growth. We went from full employment to Great Depression level unemployment in two months. I recommend caution in pulling the lever related to personnel changes. Do not move straight to head count reductions, because a lot of other personnel related actions will reduce spend but are not quite as drastic.

FEI Daily: What if you have no other choice but to move ahead with personnel changes or reductions?

Grivetti: As with any changes related to personnel, I recommend that all options be vetted with legal counsel and that management develops a good communication plan.

Communication is very important when dealing with personnel. In order to keep the team engaged and motivated, management has to provide a good picture of what is required for the survival and eventual recovery of the company and involve the team in the development and execution of the solution. Some solutions that might be tried before considering head count reductions could include:

  • Postponement of raises
  • Elimination of bonuses
  • Changes to benefit levels, including mandatory use of paid time off
  • Reductions in compensation
  • Personnel changes to part-time status – though if considering this, discuss with external benefit administrators, as there might be waiver options to continue benefits at the full level
  • Furloughs – though keep in mind that for many companies, especially those based outside of large urban areas, unemployment benefits currently are very generous, so until the current federal benefits expire, personnel will be hard-pressed to return to work when the benefits are greater than previous compensation levels

These actions will not come as a surprise to employees; the situation is unprecedented in our lifetimes. However, any company actions that might be considered negative should be communicated early in the current process. Dripping out the negative news over a longer period of time can have a significant impact on employee morale. Also, in the delivery of the solution, part of the message should be that many of the changes are temporary items to assist the company in successfully navigating the next three to nine months. Management needs to stress that it will continuously evaluate the situation and consider changes as the market improves.

FEI Daily: Is there a real difference in strategies between public and private companies?

Grivetti: The communication plan is the important difference in strategies. Public companies are under more scrutiny, and both good and bad news tend to have a more significant impact. Management must craft and present this plan not just for employees but also for investors, customers, vendors, and the public at large, and the delivery of the message can actually affect operations.

FEI Daily: What about the future? Do you see this crisis as upending the forecasting responsibilities of senior-level executives?

Grivetti: Healthy companies have always monitored several metrics – such as sales, shipments, or certain production statistics – on a daily or weekly basis, but most financial analysis is performed on a monthly or quarterly basis. However, right now, waiting for full monthly results to evaluate performance is not sufficient. Financial executives have to analyze performance on a much more granular basis.

The best companies now are monitoring performance on a weekly, if not daily, basis in order to continuously assess viability and avoid surprises. The increased analytic effort is made difficult right now because many management teams are working remotely. Companies that have not invested in their IT systems are limited because of a lack of data, right when more data is required. This situation is truly the most unique any of us have had in our professional careers.

FEI Daily: Is there even a way to accurately forecast what will happen in the current environment?

Grivetti: Management has to spend a lot more time in conversations with both customers and vendors, because they’re in the same boat, with the same leaks.

I’ve worked with a lot of distressed companies over the years. Usually vendors are well aware that a customer is distressed because the customer has had to stretch their terms, which has led to difficult discussions. However, in those same distressed situations, companies often have been able to rely on their customers to continue to behave the way they have in the past. But in this current situation, a company cannot rely on its customers’ past behavior, because the customers might be just as distressed. Management is going to have difficulty forecasting when the company might receive payment and how different from normal terms customers will be. It’s necessary to maintain continuous communication with customers and vendors along with continuously updating that daily or weekly forecast.

Another recommendation is to reconsider the whole cash conversion cycle now, which a lot of companies have never done. Management does not often think about cash conversion that granularly – cash in, cash out. However, in the current situation, management might discover that the company’s liquidity has stretched because the company’s best customers have a really long cash conversion cycle. A company might have a significant amount of time from the purchase of an input until when the input converts into a product and eventually until payment comes from the customer. Now is the time to evaluate those “investments.” Should a company invest right now in buying inputs for a customer when the company takes a month to manufacture the product and (hopefully) is paid 90 days after shipment? That is a long cash conversion cycle.

Liquidity really is about working capital and how the investment intertwines with your whole operation. However, most management teams are more focused on evaluating net income and gross profit margin on a monthly basis. The current situation is the time to focus on how a company converts its investments into cash and how quickly that conversion happens. Evaluating cash conversion needs to occur on a daily basis so a company can fund certain key expenses and obligations.

FEI Daily: What do you see as the best practices in engaging with banks when you have potential cash flow issues?

Grivetti: Any capital provider will want a good idea of where the company is at from a liquidity standpoint and what the company’s “ask” needs to be.

Management has to do its homework, with a very specific and thoughtful analysis in order to be able to support the ask: “Here is where we have an issue. Here is what we need from you, capital provider, to help us get through this situation.”

I recommend management create a 13-week cash flow analysis, which is presented on either a weekly or a daily basis. The 13-week cash flow analysis is a standard tool for distressed companies and is focused on how a company generates and manages cash. The analysis will require some effort for most management teams, because it is not accrual based; it is cash in, cash out. Note that over the full length of the analysis, the analysis does need to reconcile into a company’s broader business plan. The entire management team needs to be involved, because different departments are going to have different ideas about the company’s obligations and required investments, and every department needs to be accountable for the results.

Once the 13-week cash flow analysis is prepared, it should be continuously updated and reevaluated. After management provides a forecast to outside constituents, capital providers will start tracking the results. Management has to build some credibility proving that, “Yes, we know what we’re doing. Here is how we are managing operations, here is the explanation when the results are off a bit, and here is how we’re continuously adjusting that forecast going forward.”

FEI Daily: This is a unique crisis on several different levels. How do you keep a strong management bench that can live up to these sorts of expectations in a crisis?

Grivetti: As noted previously, the current situation is unprecedented in our lifetimes, but for most companies, it is not unlike distressed situations seen in other economic downturns. Some seasoned professionals in the marketplace have a fair amount of experience in dealing with liquidity issues and managing customers and vendors in a crisis. Experienced financial executives have already created 13-week cash flows and taken over the role of chief restructuring officer or liquidity manager. However, the bench of those experienced professionals is not deep, and the past decade of economic growth has not prepared many executives for the tasks at hand.

The current challenge is especially difficult for previously healthy companies that have never dealt with any distress. Some companies have not had to borrow money in many years. Those management teams might not be well prepared to deal with the current environment; often those teams are not even aware of what information is available in their systems to evaluate operations on a daily and a weekly basis. Some of those teams might need a little more help and a little more hand-holding. For those companies, it might make sense to invest in professionals on a temporary basis to help the management team produce the information and, more important, teach management how to prepare the required types of analyses and provide resource support in order to achieve the desired results.

FEI Daily: What do you think are the longer-term capital liquidity considerations that people need to think about right now?

Grivetti: Now is the time to really consider how to optimize operations going forward. Changes that were considered in the past to optimize your processes and improve efficiency could be an option in the current environment, when operations are not at full capacity and some plants are empty. Evaluate all productivity improvements, fixed asset configurations, and material and services sourcing options.

Executives should be asking a number of questions, including:

  • Do we really need the space we have now? A lot of companies have discovered they do not need the office space that they have because some employees can work remotely.
  • Could we consolidate facilities and improve efficiencies?
  • Are the IT systems optimized for future growth? Many companies’ financial and IT systems have not held up well under the pressure of this current crisis, causing difficulty closing the books and providing management timely information on which to base decisions.
  • Are we better off outsourcing certain operations, improving our ability to function no matter what type of disaster or situation occurs?
  • Are there certain nonessential product lines or businesses that we have within our portfolio of operations that we should spin off or carve out?

Another consideration for financial executives – especially at companies that are weathering the storm a little better than others – is acquiring struggling competitors. The current crisis is an opportunity to consider acquiring certain complementary product lines or businesses at a distressed price. Acquiring distressed operations is unusual; not many management teams have experience with that effort, and while the endeavor can be scary, the target could offer a really good opportunity to position your company for improved long-term results.

FEI Daily: Do you think financial executives have a real understanding of the scope of what’s going on, or are we just not there yet?

Grivetti: The understanding varies depending on the industry and the management team itself.

Several weeks ago, Crowe produced a webinar regarding liquidity management and cost optimization, and more than 350 executives participated. I was surprised that, in response to one question, more than 20% of the responding audience had done nothing unique regarding liquidity management or cost optimization. Some of those executives work for “essential” companies that government shutdowns have not significantly affected, and for others that response might have changed in the weeks since that webinar, but I was still surprised that more than one out of five had done little at that point.

Most of my clients and friends that are financial executives have, for the past month, been working long days trying to figure out the best options for their companies and evaluating all of the available government programs and other options for surviving this pandemic and the related government responses. Thankfully, many of those executives are actually starting to come out of that crisis mode now, having made some difficult decisions, and are considering how best to open up operations and ramp back up to the “new normal.”

 

This Q&A was originally published by FEI Daily in June 2020.

 

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