Like all businesses, private equity firms require access to readily available cash. You need these funds to cover a variety of expenses, including short-term investments and current debts. When companies in your portfolio are successful, this is rarely an issue. Their earnings help fuel yours and liquidity is constant. 

What happens, then, when a struggling company threatens to upset this balance? Left unchecked, one weak link could quicken your burn rate and shorten your financial runway. 

This is where liquidity management comes in. Today, we’re sharing how you can free up working capital within struggling portfolio companies, allowing you to facilitate a rapid turnaround. 

Common Signs of Liquidity Issues

Is a company in your portfolio running short on cash or cash equivalents? If so, it will soon be unable to meet its immediate operating needs, which could undermine its very foundation. 

Declining cash flow is just one sign that a company is struggling with liquidity issues. Other common signs include:

 

  • Large contingent liabilities
  • Unresolved near-term debt maturities
  • Increase in outstanding accounts payable
  • Increase in accounts receivable aging

It ain’t over till it’s over.

There’s still hope. We’ll salvage the financial wreckage by optimizing capital and cash flow.

9 Liquidity Management Tips for Struggling Portfolio Companies

You’ve identified the signs and you’re ready to take action. Let’s take a look at a few of the ways you can help a struggling portfolio company begin the turnaround process:

1. Focus on Short-term Cash Management and Monitoring

Before attempting to initiate a major financial restructuring, immediate focus must be given to the company’s short-term obligations. In other words, how much cash does the company need to finance operations right now? 

Immediate expenses might include:

  • Rent or mortgage payments
  • Bank fees and interest
  • Equipment and software
  • Utilities
  • Insurance
  • Payroll

As the company gains financial stability, the focus can slowly shift from liquidity to solvency.

A team of business crisis consulting experts can help you create a cash management and monitoring plan for the near future, focusing initially on properly allocating every dollar earned.

2. Use Cash Flow Forecasting Tools

Are you unsure how much cash flow the company will have access to over the next few weeks or months? Invest in cash flow forecasting tools. 

These automated tools are quicker and more precise than manual, administrative efforts. You can find a variety of cash reporting solutions that collate data from a variety of touchpoints, including:

  • ERP systems
  • Bank transactions
  • Bank account statements
  • Data input from other business units

Using these tools, you can gain instant, real-time insights into the company’s cash requirements, as well as their ability to meet them.

liquidity-management-services

3. Focus on Working Capital Management

As you work to help the company improve liquidity, it’s important to ensure current earnings are being used to the best effect.

Managing working capital means maintaining a sufficient balance between the company’s assets and liabilities. It requires keeping a close eye on three main components:

 

  • Accounts receivable
  • Accounts payable
  • Inventory levels

4. Renegotiate with Vendors and Lenders

Another step that can help free up cash flow is to contact the company’s vendors and lenders. Explain the situation and see if you can negotiate a lower rate or more favorable terms, even just for the short-term.

To make your case, it helps to have a structured repayment plan in place. Your lenders will need to see the steps you have in place to ensure the company doesn’t default on their obligations.

5. Identify Debt Restructuring Opportunities

Debt restructuring can help companies avoid the risk of default and lower their overall debt payments. In most cases, this involves taking out a new, overarching loan to help pay off multiple creditors.

This can help struggling companies avoid bankruptcy and immediately improve their business cash flow.

A consulting firm can point you in the direction of the most valuable restructuring plans, as well as advise you on their application.

capital-and-liquidity-management

6. Conduct a Collateral Assessment

When liquidity is a concern, it’s important to understand how much of a company’s assets are currently pledged as collateral for business loans.

A collateral assessment determines the fair market value of these assets. If the company was to default on the loan, how much would they lose and what are the real risks involved in doing so? These details are essential to making an informed step forward.

7. Focus on Capital Optimization

As with working capital management, capital optimization means optimizing the balance between a company’s assets and liabilities. A few of the common steps include:

 

  • Collecting company background and key data
  • Reviewing the company’s capital program
  • Examining the steps in the project lifecycle
  • Reviewing current staffing and organizational structure
  • Looking for new opportunities and areas of improvement
  • Creating a roadmap to refocus processes, roles and tools on achieving cost reductions

8. Use Financial Modeling

It’s important to summarize a company’s expenses and earnings to evaluate the impact of a future event.

Though this step can be performed manually, automated platforms remove any guesswork and room for human error. These tools can help you make informed decisions to protect a company’s financial stability during the restructuring process.

9. Focus on Contingency Planning and Bankruptcy Planning

Along with financial modeling, a comprehensive contingency plan can help an organization plan for an unexpected event or situation. Most plans include:

 

  • Conducting a business impact analysis
  • Developing preventative controls
  • Establishing contingency strategies

 

In addition, it’s wise to conduct basic bankruptcy planning. In the event that a company is required to file for bankruptcy, pre-planning can help simplify the process. Key steps include:

 

  • Allocating funds to bank accounts
  • Paying necessary utility bills
  • Notifying creditors
  • Canceling automatic payments

The Importance of Business Process Management

The above steps can help you restore short-term liquidity for a struggling company. However, there are greater issues at play that caused cash stores to dry up in the first place.

To uncover these issues, we recommend focusing on business process management or business process reengineering. Digging deep into the company’s core processes enables you to address the root causes of poor performance, rather than continuing to react to the symptoms.

The key components of business process management include: 

  • Analyzing current operations
  • Identifying pain points
  • Providing leadership and change management support
  • Establishing process ownership 
  • Defining clear roles and responsibilities
  • Reorganizing operational structures
  • Improving business processes to increase operational efficiency

When the real issues behind liquidity concerns come to light, companies can take the right steps to ensure against a repeat problem.

Do You Need to Take Immediate Action?

When a company in your portfolio is struggling to meet short-term cash flow demands, immediate action is required. With the right liquidity management practices, you can facilitate a business turnaround.

In addition to addressing the immediate issue, engaging in business process management can help you address the underlying issues that catalyzed the cash shortage in the first place. With this approach, you can set each company in your portfolio up for continued, long-term success.

Looking for a consulting team to help guide these efforts? Our business turnaround consultants can help. Request a free consultation below. 

Posts You May Like:

How to Build a Continuous Improvement Culture

How to Build a Continuous Improvement Culture

You can't outpace your competitors, build your bottom line and establish your brand as an industry leader if you follow the status quo. You must be willing to look beyond proven best practices and consider how you can make them better, stronger and more efficient....

How to Ensure Business Readiness Before an ERP Project

How to Ensure Business Readiness Before an ERP Project

Making the transition from disparate, legacy systems onto a centralized enterprise resource planning (ERP) system is a major change. While the benefits of ERP software are vast, it's important to ensure your business is ready to embrace it. Today, we're sharing a few...