Preparing for debt, restructures & financing conversations

In these critical times and the impact of Covid-19, managing cash flows and recognising business red flags is key to having constructive conversations with bank creditors. In a recent webinar, “Preparing for debt, restructures and financing conversations” we explored the journey from trading normally through to bankruptcy and what signs to look out for to recognize signs of distress.

These are challenging and unprecedented times. The current economic climate – with supply and production chain disruptions, shipping and manufacturing delays and weak consumer spending – requires businesses to refocus their strategies in order to weather the storm.

A critical area of focus for all businesses at this time is debt management. During a recent HSBC-led webinar, over a quarter (28 percent) of participants expressed concern at being able to service their debts in the short to medium term.

In a similar poll, nearly half (45 percent) of respondents said they were concerned or very concerned about their business’s cash flow. Yet the importance of cash cannot be understated in this COVID-19 environment, as even the most profitable businesses are unlikely to survive if they run out of liquidity.

Focus on cash management and conversion

Good housekeeping and timely reviews are critical in order to ensure effective management of cash and cash flows. Businesses need to focus on cash conversion, moving away from being a sales-driven culture to creating a cash-centric mindset throughout the company. In addition to understanding cash flows for the next one or two weeks, industry best practice indicates that companies need to project cash flows on a 13-week basis.

Intelligent supply chain management underpins a deep knowledge of cash flows. Businesses must manage receivables and payables proactively in order to avoid being caught between buyers asking for extended terms and suppliers demanding payment.

Identify and deal with red flags

In this constantly evolving trading climate, businesses need to know the warning signs that may indicate if the business is about to face difficulties. Keeping a close eye on potential red flags around liquidity, governance and operations will allow you to be nimble and move fast and decisively.

In the liquidity bucket is the need to be on top of both cash and debt management, as a constraint on cash will impact your ability to service your debt. A lag in cash generation may have a knock-on effect on working capital going forward, so companies need to understand their debt facilities and potential impact on these as signs of distress may become apparent.

Companies that have one dominant decision-maker are compromised in their ability to act nimbly, as fast-changing situations require collaborative decision-making and sharing of information by the whole management team. Without a clear chain of responsibility and accountability, inherent issues within management structures could lead to a swift breakdown in best practice corporate governance.

Operational red flags occur when there is a lag in the strategy and business plan, with missed targets and deadlines. While variances are normal, surprise misses as a result of quality issues or the loss of key staff will have a follow-on impact on cash flow and viability.

Actions to mitigate these red flags include recognising that strong corporate governance affirms rather than dilutes and will lead to collective and collaborative decision making, so that all of senior management are aligned and accountable. Decisions also need to be transparent and properly documented in case an insolvency scenario arises.

This crisis situation is the time to increase reporting of financial or other KPIs and build in KPI triggers for red flags within the business. Companies also need to make tough decisions with regard to key personnel, and recognise which staff are the right assets for the right time.

Establish transparency and trust

The most useful mindset shift in a turnaround situation is to think short term rather than looking for long, organic growth. This includes asking what you can do to create cash, as well keeping communication channels open and having tough conversations with your bank.

If you are heading into difficulties or facing cash flow issues, more options are available if you start conversations early. Talking to a bank creditor when you still have positive cash flow is much stronger than when you move into a default position and there is little you can offer the bank or other creditors.

The UAE has a regime in place for corporate and personal bankruptcy where a court-supervised process will buy time to restructure and work with creditors. However, this is an option of last resort as requirements are strict, you will need creditor support, and failure could mean liquidation of your business. Where possible, therefore, consensual restructuring outside of a court procedure is preferable.

In this challenging economic situation, a key lesson is for businesses to have regular, honest discussions with suppliers and bank lenders, so that all parties are fully aligned. Daily reviews of your liquidity position will provide the insights necessary to pre-empt requirements, identify red flags and allow you to have the right conversation as early as possible with lenders.