Cash is Oxygen During the Restructuring Process

Revenue is vanity, profit is reality and cash is certainty. In medical analogy, revenue is the food, profit is the water and cash is the oxygen. You cannot pay rent with profit, you can only pay your rent with hard cash. Cash talks, the rest walks.

Just as a critically ill person needs to be administered with fresh oxygen, an ailing company's immediate lifeline is cash, cash and more cash. Fresh fund injections will provide the fillip needed to get the system moving on an even keel as well as to create stable platforms for growth.

In almost every turnaround situation, there is a troubled project that is bleeding or draining cash at an accelerated speed. For a variety of unhealthy reasons such as neglect, denial or mismanagement, these problems remain unresolved. The turnaround team need to apply the tourniquet and immediately stop the continuous haemorrhage and unrelenting outflow of cash. The turnaround team's task is to stomp out the fire and slow down the rate of burnt-out. The West would call this "stopping the bull by its horns," and the East calls it 'catching the tiger by its tail." The managers need to adopt this approach during restructuring. Also they need to promote 'corporate catharsis'to purify the system and set the tone of the mode of operation. It is no more business as usual.

Other cash flow problem arises when the bank recalls its loan or terminate other lines of credit to the company. In Singapore, many small and medium size enterprises (SMEs) run into cash flow problems when the local banks cut or reduce the bank loans. In 2003, there was a record high of 4484 individuals who were declared as new bankrupts. In the past there were six major local banks with banking officers who understood the sentiments and businesses of SMEs and had close banking relationships with them.

However, in recent years with mergers and restructuring in the local banking scene, only four major banks remain with many of these banking officers retrenched and the bank loans to the SMEs drastically reduced. The banks' understanding and rapport with the SMEs are lost. The new banking officers are stricter and loans are not given to SMEs, which exceed the banking credit facilities and do not provide proper accounting records. Also, the local banks have shifted their focus to other low-risk and fee-based services. The Singapore SMEs suffer from 'corporate asphyxia', deprived of its vital oxygen supply - cash.

The demands for funds will be there - paying the rental, workers' salaries, bank loan and interests, implementing new technology, upgrading current equipment, reviving R&D, providing advertising support to brands, training people, acquiring competitors to add critical mass to the company, and so on, the list is endless.

Hence it is vital for the turnaround manager to find ways of improving short-term liquidity, cut costs and at the same time, negotiate new loans from the current lenders.

Measures to improve cash flow include - reducing inventory and disposal of obsolete ones, tightening stock control, increasing the selling price, divesting ventures that do not add value to the core business, reducing costs, finding refinancing, factoring the receivables, implementing sales and leaseback, exploiting hidden assets, recouping prepaid expense, renting out idle capacities and persuading the customer to pay cash and in advance as well as laying off/downsizing. Fresh funding is critical to jump starting the system. Avoid bankruptcy and improve your cash flow.

Every bad debt starts out as a slow repayment, so you need to be vigilant of your collections. Disproportionately high receivables and inventory are trouble signs. The balance sheet calls them assets. They should actually be called liabilities. Cash is an asset, you can buy many things with it. Mounting inventory or receivables is the first warning that the service or product is slipping while your income statement still shows profits. Also do not confuse external borrowing with positive cash flow. Proper accounting says it is, but this is short-term thinking. Only sales collected are the authentic cash flow. All else is temporary or even worse.

Managing cash flow to meet working capital requirements is very important. With insufficient working capital, a business can wind up despite being profitable. On the other hand, an unprofitable business can continue operations if it has sufficient cash to pay its creditors.

Though cash is not everything, its level of importance is the same as oxygen. Without it, you will certainly perish.

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