Observations by Pat Brennan, Platinum Partner
Many business owners have been facing uncertain market conditions for the last year. Their customer buying patterns have been disrupted by the uncertainty facing all of us today. Unprofitable operations, a decline in the collateral value of assets used to support bank loans and erosion of working capital from ongoing losses are leading many owners to wonder if their businesses can be sustained.
Common signs of the problem:
- A lender who is not supportive in the current market environment, resulting in changes to lending parameters.
- Value of assets are eroding, such as real estate owned by the company which once was seen as a credit enhancement to the company’s operating credit facility is no longer perceived as having relevant value.
- The owner doesn’t understand what sales level must be achieved to be profitable.
- Customers may be less credit worthy, which exposes owners to more risk once the sale is complete.
- The owner doesn’t know how much working capital will be needed to survive in the near term.
Tools to apply:
- Calculate the break-even point using the month-end income statement. Make it a practice to calculate your break-even point monthly as a part of your financial statement closing package. The difference between fixed expenses that can be supported at a break-even sales level versus those that are actually incurred will quantify the working capital being used or generated by the company’s operations. Where actual fixed expenses exceed break-even levels, a decision should be made as to how the company will address its cash burn. Ask yourself: “Will the company reduce its expenses or seek additional working capital?” Click here for Break-Even Calculator.
- To help manage through the uncertain market horizon, develop a rolling, 13-week cash flow projection. This quantifies the amount and timing of your working capital deficiency. Click here for the article “Running on Empty.”
- Conduct a balance sheet assessment to review each category for opportunities. Examples: Can inventory be sold to generate cash? Are there many delinquent receivables? How can collections be accelerated? Should the services of an outside collector be retained? Could discounts be offered to customers? A thorough review of the balance sheet can help surface those opportunities to generate additional working capital.
Please refer to the following tools: