Create a Turnaround
Plan in 4 Steps

No company is without its challenges. In moments of distress, however, the need for serious change can be vital. This is where a turnaround plan can be pivotal. It’s a process of renewal – one that not only identifies key underlying issues within the company but actively implements change at the deepest levels in order to restore health to an organization.

Making decisions that involve change can vary depending on the types of difficulties a company is facing. The turnaround plan should start with the goal of maximizing the value of a company for all stakeholders while transforming it from an underperforming company to a performing company. There are numerous ways to accomplish this which include doing an out-of-court workout, acting as the chief restructuring officer, being a court-appointed receiver, and/or filing for bankruptcy. No matter what option you choose to accomplish your plan, every plan contains these four core steps:

 

1. Identify the underlying issues affecting the company

  • Assemble a team of advisors/advocates for the company. This may include a financial advisor, a CPA, a debtor rights counsel, an appraiser, and/or customers.
  • Assess the Situation. This includes leadership, finance, operations, sales, and marketing. Talk to key stakeholders. Implement a rolling 13-week cash flow model to provide further insights into the company’s financials.
  • Communicate findings with leadership and stakeholders so they can understand, commit, and support the discoveries.

2. Develop a clear, realistic plan that creditors will support

  • Identify ways to raise cash. Options include A/R collections; new sales; vendor payment plans; expense reductions; reduced inventory – sell and don’t replenish; ownership cash infusion; and sale/leaseback of property.
  • Evaluate the company’s lending situation and options such as a forbearance agreement; over formula on the line of credit; and other financing.
  • Stabilize the company – utilize customer communication and relationships; key employee retention plans; maintain employee relationships; communicate with the bank; leadership changes (if appropriate); operational issues addressed – safety, equipment, process improvements, etc.; and financial issues addressed – current financials, inventory costing, etc.
  • Considerations – take into consideration the long-term stress the company has been under; customer frustration; vendor frustration; that COD/Prepays are most likely in place; and an over recognition of the environment in which the company is operating.

3. Validate the plan by ensuring buy-in from stakeholders

  • Stakeholders – revisit who key stakeholders are; present the plan to stakeholders and explain how they will benefit; articulate what the company needs from stakeholders and determine what stakeholders need from the company.
  • Communication – develop a communication rhythm that may include a weekly call with the bank, a weekly review of cash flow, daily/weekly check-in with the leadership team, daily/weekly call with key customers to discuss quality, delivery, and/or funding needs as applicable or daily/weekly call with key vendors.

4. Execute the plan with a sense of urgency

  • Assign responsibility and accountability with due dates
  • Conduct daily/weekly meetings with leadership on plan status
  • Weekly review of rolling 13-week cash flow to drive decisions and actions
  • Measure progress and make adjustments as needed

 

All companies experience performance challenges at some point. If your business finds itself facing some immense challenges, just know that you’re not alone. We work with clients who have questions about what this all means for them, what options and conditions for support or exemptions apply, what implications are for team members, how to mitigate business value erosion, how to manage communications with banks/creditors/vendors/customers, etc. All that to say, we’ve seen businesses make successful turnarounds when they choose to implement a plan.

At DWH, we’re here for you. Feel free to reach out for a conversation on how we can be of assistance as you focus on thriving and not just surviving.

 


This post was written by Heather Gardner
hgardner@dwhcorp.com | LinkedIn

All companies experience change.
Plan for it with us.

 

Understanding Your Cash Conversion Cycle

Group of financial analysts

CCC: What Is It?

The Cash Conversion Cycle (“CCC”) is an important metric used to determine the number of days it takes a company to convert cash outflows (purchase of inventory, manufacturing expenses, etc.) into cash inflows (collections of receivables).  The longer a company’s CCC, the more working capital it will need to fund operations.  This metric is especially important when a company is evaluating the working capital needed to fund expansions, new projects, or growth.

How Is It Measured?

There are three components of the CCC. They include Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO). The formulas for determining these are below:

  • DIO = (Average Inventory on Hand / Cost of Goods Sold) X Days in the Period
  • DSO = (Average Accounts Receivable / Revenue) X Days in the Period
  • DPO = (Average Accounts Payable / Cost of Goods Sold) X Days in the Period

Days in the Period are determined by what information you are using to do your calculation. For example, if you were measuring your CCC using numbers that reflected an entire year, the period would be 365 days. If you were measuring just a month, the period would be 30 days. Once you have determined your DIO, DSO, and DPO, the formula for your CCC is:

CCC = DIO + DSO – DPO

How Can I Improve My CCC?

It all starts with understanding your current state. What is the first thing you do when you are about to embark on a new journey? You look at a map and figure out where you are relative to where you want to be. You will never be able to measure progress if you do not know your starting point. Calculate the CCC for your company using the most recent financial data and the formulas provided earlier. This is your, “You Are Here,” marker.

Can you recall a time in your company’s history when cash was NOT tight?  What was the CCC leading up to and during that period? How does that compare to your current CCC? How does your CCC compare to the standards within your industry? Use the answers to these questions to guide the goal-setting process. Taking steps to improve your CCC leads to improved efficiencies for the company by converting inputs into cash. The goal is to free up working capital, and with the CCC method, you’ll be able to ensure your business has enough cash for when you need it most.

Identify & Quantify Cash Levers

As you begin to establish cash conversion goals, you will discover a variety of “levers” that can influence cash flow. Some common levers are listed below. After reviewing this list, decide which levers are most relevant to your business. Quantify the impact of each lever to determine the potential impact on cash conversion.

Sales & Marketing Levers:

  • Early Payments – Will any of your customers offer accelerated payment terms? Offer early payment discounts, as necessary.
  • Demand Planning – Can you engage with your customers planning and purchasing departments to ensure you have access to the most reliable product demand information? Structure your agreements in ways that allow you to level load your operations.
  • Discounts & Promotions – Do you have opportunities to offer discounts or promotions on slow-moving or obsolete inventory? Are there brokers available to provide immediate cash for this inventory?  Can any of this inventory be re-purposed for other sales channels or product lines?
  • Selling Excess Capacity – What areas of the business have excess capacity? Use this information to offer discounted pricing as needed to fill this capacity.

Supply Chain Levers:

  • Extended Payment Terms – Request extended payment terms from your key vendors. Remove any early-pay discount programs as applicable.
  • Material Lead Times – Evaluate long-lead material items, seeking alternate sources with shorter lead times, or assist your vendors in reducing these lead times.
  • Optimize Order Sizes – Review your planning and ordering process to ensure you are ordering in the most economical batch sizes.
  • Optimize Order Triggers – Establish parameters around raw material on-hand quantities to prevent excessive buildup of inventory. Set up replenishment systems, or vendor-managed inventory systems that allow you to reduce your liabilities.

Production Levers:

  • Production Lead Times – What are your internal production lead times for your highest-cost items? Look for bottlenecks in the process and find ways to eliminate this buildup of inventory.
  • Minimize Finished Goods Inventory – Establish parameters around finished goods inventory, highlighting areas where completed product is sitting on your shelf for more than a few days.
  • Increase Throughout – Are there bottlenecks in your production process? Use this to determine where you might need to add more capacity (human or capital resources).  Find equipment that is under-utilized, working with the sales team to bring in work that can fill this capacity.

Financing Levers:

  • Asset Management – What assets are available that can be used as collateral?
  • Negotiate Advance Rates – Negotiate with your bank to find the best inventory and receivable advance rates.
  • Micromanage Collection Process – Maintain proper oversight over your AR collection process to limit past due invoices that might become ineligible.

Make a Plan

Decide on a goal and create a path that moves you toward that goal. As with any good plan, make sure you have identified key milestones and assigned appropriate ownership to key elements of the plan. Each element should relate to the identified levers. Work through all the levers you previously identified, adjusting your plan as more information is gathered and as progress is made. Maintain clear and consistent communication within your team ensuring all opportunities are fully explored and executed.  Document and measure your progress along the way. As movement is made, priorities will change and new levers will come into play. Re-establish your current state, set new goals, and repeat the process.

Conclusion

Monitoring your cash flow can often be a daunting and nebulous task. You can use the Cash Conversion Cycle measurement as a tool to objectively monitor your company’s effectiveness in managing cash. Using the tools and steps above can help to significantly improve the liquidity of your business and reduce future risk.

 


Originally posted on June 1, 2021, by Jeremy Cosby
jcosby@dwhcorp.com | LinkedIn

All companies experience change.
Plan for it with us.

 

Stories from a Financial Advisor

Image of a couch at home

For many people, the idea of hiring an advisor can feel intrusive, threatening, costly, or even downright unnecessary at times. As long-time advisors at DWH, we’ve heard things like…

“I’ve been in this business for 40 years. No one can tell me anything I don’t already know.”
“I don’t want someone I just met telling me how to run MY business.”
“My business is unique, and no one else does things the way we do, so your ‘standard solutions’ won’t work here.”

Although these are common sentiments, we’ve discovered that sometimes the best way to articulate the value of a good advisor is not with clever arguments, but with a story.

First Story: The Couch Maneuver 

I recently went over to a friend’s house to help him move his couch. The house was a bi-level with a small flight of stairs leading to the front door. We transported the couch down the stairs and were trying to maneuver it through the doorway; it wouldn’t budge.  We then stopped for a minute, evaluated the situation, and tried harder.  Still stuck.  After 2-3 minutes, we noticed his neighbor standing just outside the house, entertained by our efforts.  Without hesitation, he said, “move it back up one step, rotate it about 30 degrees and come back down.”  With no better options but to swallow a little bit of pride and take his suggestion, we did as he instructed.  Sure enough, within seconds, we were out of the house, and the couch was in the truck.

This wasn’t his couch, nor was this his house; in fact, I don’t think he’s ever even been inside the house.  He had a perspective we didn’t have that he could use to identify problems we couldn’t see and suggest a quick, simple solution.

Second Story: The Golf Swing

I’ve always been terrible at golf, but for some reason, I’ve noticed this year that I’m getting worse the more I play instead of better.  I was reading articles on how to improve my swing, spending more time at the range, even shopping for new clubs.  None of it mattered.  Still no improvement, in fact, the opposite.  Finally, I decided it was time for me to seek some professional help, so I signed up for an evaluation with a local professional golf coach.

After some brief discussion about the challenges I was experiencing and what I hoped to accomplish, I was directed to a special room with several cameras, four tv screens, and a giant net to hit into.  I was instructed to swing “like I normally do” and hit a few balls into the net.  Cameras from multiple angles recorded my swing so the instructor could then replay the video, dissecting my swing frame by frame.  Every element of my swing, from the setup to the backswing, contact, and follow-through, was compared to a database of “baseline” measurements generated by compiling the average swing of the top 100 professional golfers in the world.  As painful as it was to watch, it allowed me to see how my swing compares to a professional.

I’ve never actually seen my golf swing before, which makes sense as there aren’t exactly a lot of mirrors on golf courses.  Within those 90 minutes, I was able to SEE what was causing that awful slice and begin to make a plan to correct some unhealthy habits.  There was not one magical fix (unfortunately), but a couple of fundamentals that I need to practice, which will start pushing me towards a path of improvement.

Hopefully, by now you can see where I’m going with these stories…

We need trusted advisors in our business (and frankly, in all areas of our life) because a good advisor can provide a perspective only an outsider can give.  They can see things from multiple vantage points (the forest AND the trees) and make comparisons to what the best companies in the world do (a.k.a. “Best Practices”).  A good advisor will leverage the decades of experience you have in your business, or within your industry, to help you see things from a new perspective. And seeing things in a new way is the first step to breaking old habits and creating meaningful change.

When you’re ready, we’re here for you — and for the life of your business.

 

This post was originally written on August 11, 2021, by:
Jeremy Cosby, DWH Partner
jcosby@dwhcorp.com | LinkedIn

Succession Planning: Preserving Company Legacy

Business colleagues discussing work

Determining when and how to transition leadership or ownership to family or employees is vital to preserving a company’s value, legacy, and continuing success.

Yet, according to a 2021 survey, fewer than 34% of family-owned businesses have a formal succession plan that has been communicated to stakeholders. Failure to have a plan in place not only puts the family business and family relationships at risk but can also have an impact on employees and the community.

When it comes to developing a strong succession plan, it’s best not to go it alone – it is a team sport involving legal, financial, and business advisors.

By being proactive, you can ensure smooth transitions, optimize strategic development options, and maximize value so that the business thrives for generations. For instance, bringing in a third party to conduct an assessment can help to uncover current challenges and blind spots, not unlike how your trusted mechanic performs a multi-point inspection on your car. This drives an iterative discussion on observed challenges, risks, and opportunities, which are then contrasted with best practices.

Additionally, you’ll want to work with key members of your team to align expectations for the company’s future – that could range from transforming the business for the next generation to specifying a transition plan for leadership positions, to the development of individuals or family members. Whatever the scenario, the goal is to create alignment in vision and strategy.

If your business doesn’t have a plan in place, we can help, as our business advisors have helped many clients develop their succession plans. We can facilitate a planning process that is both strategic and integrates succession in such a way that considers the ‘why’, ‘how’, and ‘what’ of your business.

Our planning process includes action points that address near-term gaps and achieve mid-to-long-term objectives – all while reducing risks. We’ll also provide ongoing support with resources and experience to guide process improvements, capability development, and implementation of the plan.

To learn more about our strategic succession planning and transformative processes, click here.

 

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: Family Business Planning – Preparing the Next Generation to Lead and Who Should be Next in Line to Lead the Family Business?

 

This post was co-written by:
Marcel van der Elst, DWH Senior Director, and Jordan Gunn, Collaborative Designer

How to Preserve
and Improve Liquidity

Image of businessman doing financial planning

When it comes to maximizing the value of your business, it’s best to focus resources and energy on improving cash flows and managing risks. The last two years have brought a number of unique challenges to business leaders and liquidity has become a significant topic. Companies are having to make major decisions that will potentially impact cash flows. So how can leaders address this?

Step 1: Develop a Cash Flow Forecasting Tool

When it comes to best practices around preserving and improving liquidity, we like to suggest one approach that has proven to be effective among many of our clients – and that is to develop a robust 13-Week Cash Flow Forecasting Tool. This financial tool helps businesses accomplish three primary objectives:

    1. It predicts cash flow and collateral, week over week, for the next 90 days.
    2. It improves decision-making at the transaction level.
    3. It improves communication with key internal and external stakeholders.

An effective 13-Week Cash Flow Forecasting Model also shows the details of anticipated cash receipts, cash disbursements, and changes in bank collateral through the forecast period. Specifically:

    • Cash Receipts – your company should forecast cash receipts from:
        • When current Accounts Receivable (AR) will be received.
        • When future revenues will convert to cash receipts.
        • Other non-operating cash receipts (e.g., interest income, proceeds from the disposition of assets, draws on a line of credit, etc.).
    • Cash Disbursements – your company should forecast cash disbursements from:
        • Current accounts payable (AP).
        • Future planned expenses*.
        • Other non-operating cash disbursements (e.g., debt service, un-funded capital expenditures, distributions, etc.).*Future projected expenses can be derived from budgets and recent experience, but should also consider anticipated changes to your business (e.g., new program launches, wage increases, new hires, etc.).
    • Bank Collateral – the collateral component is often missed in cash flow forecasting models and can lead to unanticipated liquidity challenges. Cash receipts, cash disbursements, and other business activities can have an impact on the bank’s collateral and, therefore, the company’s liquidity. A good 13-week cash flow forecasting model should take into consideration how changes in AR and inventory impact the bank’s collateral and, therefore, the line of credit (LOC) availability.
    • Cash on Hand – Cash on Hand is calculated using the following formula: Beginning Balance + Cash Received – Cash Disbursed +/- Changes in LOC
    • Miscellaneous – Here are a few other things that you should keep in mind as you build your model:
        • The cash flow should be rolled at least weekly. In times of crisis, you may want to roll it daily.
        • As a result, the model should be easy to create and update.
        • The model should be linked to your accounting system or allow for direct imports of data from the accounting system.
        • Have a weekly clean cut-off, so you are working with the most relevant and timely data.
        • The model should be reviewed at least weekly by the leadership team.

Step 2: Use the Model to Identify Levers

Once you have a functioning model, it is time to use it to find ways to preserve or improve your cash position. We call this process “pulling levers”. Reviewing your income statement will allow you to find opportunities that will improve revenue or reduce expenses. After, you’ll want to look at your balance sheet. The accounts on the balance sheet represent opportunities to accelerate cash receipts or slow cash disbursements. The balance sheet accounts also represent multiple market relationships, every one of which represents an opportunity to renegotiate to improve cash position. Consider what other sources of capital may exist for your business in your network. Examples of levers can include:

  • Cash Receipts
      • Reducing payment terms with customers.
      • Require deposits for new customer orders.
      • The additional cash infusion from owners or investors.
      • Sale of unused or under-utilized assets and equipment.
      • SBA lending or other government assistance.
      • Negotiate increases in collateral advance rates or LOC limits.
  • Cash Disbursements
      • Negotiate new payment terms with vendors or negotiate payment plans.
      • Reduce direct material order quantities or push deliveries.
      • Reduction of labor (headcount or hours).
      • Renegotiation of contracts or agreements.
      • Deferral or reduction of rent and lease payments.
      • Negotiate deferral of principal or interest payments with the bank.

Step 3: Communicate with Stakeholders

Key Stakeholders

Once you’ve built useful forecasts and identified levers, it’s time to communicate the plan to your stakeholders (think customers, vendors, employees, owners, investors, and community members as needed. Remember, your stakeholders are an essential part of your business and share in its success. When communicating your plan to your bank, describe the following:

  • How you developed your cash flow forecast
  • What your forecast shows
  • What steps you’re taking to improve your liquidity and capital position
  • What your current needs are and how might the bank be able to help

It’s better to bring a plan to your bank than to expect them to give you one. This holds for all your stakeholders. Make sure you are clear and considerate in your communication, looking for win-win solutions. You’ll gain confidence from your banking institution by showing exactly how you’ve determined your needs through management tools and decision-making.

This tool is also beneficial for the purpose of discovering the expectations of your customers as well. For instance, if a customer asks to revise payment terms, you can make the modifications in the forecast to determine the impact on your liquidity before agreeing to the change.

Step 4: Start Pulling Levers

Once you have your cash flow model in place and have communicated it to your company’s stakeholders, it is time to start pulling levers. Make sure that you develop an action list for the levers you are going to pull, including a point person for each action and a due date. Review this action list on a weekly basis. It is also essential to ensure you are updating your model as you pull the levers. If you request a customer pay in 15 days and they agree to 25 days, make sure the cash flow forecast reflects that change correctly.

Step 5: Review the Model Weekly and Continue Communication with Stakeholders

Once you have created the forecast, identified levers, communicated the plan to stakeholders, and started pulling levers, it is crucial to maintain this rhythm. Update the forecast weekly and consistently review as a team. Look for changes in the forecast and review the weekly variance report. This will help you improve the accuracy of the model. Additionally, your team should be looking for new levers on a weekly basis. It’s also important to note that in times of distress, the amount of communication with key customers, vendors, employees, financial institutions, and ownership should increase. Continue to update your stakeholders on your plan and your progress.

 

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: Navigating Unexpected Business Disruptions by Preserving Liquidity

If you’re wanting to learn more about our cash flow forecasting model or would simply like to talk, please reach out. At DWH, we’re here for you — even remotely.

 

DWH Facilitates a Unique Acquisition for Two Midwest Tribes

Tribal Economic Development

In a first-of-its-kind collaboration in Michigan, two Tribally-owned economic development companies have partnered to acquire a pair of operating companies. Waséyabek Development Company and Gun Lake Investments are investing to obtain full ownership of Zip Xpress and Green Transportation of Holland, Michigan. 

The partnership will be managed by DWH, LLC, a Tribally-owned business consulting firm that also specializes in Tribal economic development. Currently, the businesses are owned and managed by a wife-and-husband team who have built both companies from the ground up. Dina Mcknight-Dargis owns and manages Zip Xpress while her husband Mike Dargis owns and operates Green Transportation, LLC. 

“This is an exciting opportunity for us, and the collaboration with both Tribes and current ownership has been incredibly successful, making this process really effortless and enjoyable,” said Monica King, CEO of DWH, who will be actively managing the businesses. “Not only will these businesses be Tribally-owned, each entity involved is managed by female leaders, something we’re incredibly proud of.” 

Zip Xpress, Inc. and Green Transportation, Inc. are LTL and truckload companies. Zip Xpress, founded in 2021, is a woman-owned, general and specialty commodity carrier known for load consolidation and white glove services. Green Transportation was founded in 2007 to provide enhanced long-distance trucking services to Zip and several others. Both companies focus on freight optimization and environmentally sustainable solutions, something that aligns very closely with the principles of both Tribes. Unlike many other transportation services, Zip Xpress’s mission is to fully load their trucks for each trip using a unique optimization process that reduces their customers’ cost and carbon footprint. 

“For my husband and I, growing these businesses has been a labor of love, and each company has grown around the foundations and principles we believe in,” said Dina Mcknight-Dargis, current CEO and owner of Zip Xpress. “It is always a tough decision to sell a company that you have built yourself but with DWH we know it is in good hands and will only help to contribute to continued growth for our team members and the companies themselves.” 

“Leadership and a common philosophy about how our respective Tribes do business is really what makes this deal work. Dina and Mike’s commitment to their employees and the community is what makes it truly meaningful,” said Deidra Mitchell, CEO and President of Waséyabek Development Company, LLC. “The way this rounds out our portfolio, both financially and from a diversification standpoint, aligns with our investment strategy.” 

Green Transportation LLC is notable for their training school which provides a pipeline of trained and talented drivers for the company. This has become especially important during severe labor shortages across the country. 

The school focuses on teaching drivers how to operate successfully in a high-risk business and how to be healthy while doing it. Drivers that graduate from Green Transportation’s program are also underwritten for insurance with the company so they can capture more of their income from driving with most drivers making six figures within a couple years of graduating. 

While both companies are Michigan-based, they serve a national clientele with Green Transportation’s service to 38 states. Together, both companies employ around 90 people. 

“In addition to being a great investment, this acquisition also brings career development opportunities for Tribal Members in the form of truck driving instruction. This makes it an added benefit for both Tribes as Tribal Members plan for careers,” said Jamie Stuck, Nottawaseppi Huron Band of the Potawatomi (NHBP) Tribal Council Chair. 

Boards of both development companies approved the deals and partnership. Jason M. Palmer, Gun Lake Investments Board Vice-Chairman said, “Gun Lake Investments is thrilled to be part of the new ownership team for Zip Xpress and Green Transportation. Our community development investment goals, people-first companies with a history of success in Michigan, align with our strategic partners and represent another historic co-investment from these two formidable Tribes” referencing an early 2020 real-estate co-investment with their purchase of McKay Tower in Grand Rapids, Michigan. Palmer also added, “We look forward to sustaining and growing the successful business that Dina, Mike, and their team have built.” 

Waséyabek interim Board Chair Chris Rogers also added, “The Zip Xpress / Green Transportation acquisition represents more than an investment for Waséyabek and the Nottawaseppi Huron Band of the Potawatomi Indians. The collaboration of the two Tribes is an outreach and manifestation of our desire to be in partnership with other Tribes to advance Indian Country.” 

 

Original press release written by:
Rob Brown, Senior Accountant Executive at Truscott Rossman
rbrown@truscottrossman.com

5 Qualities to Look for When Choosing a Financial Advisor

Over the past 18 months, many businesses have experienced financial stress.  This may be due to COVID-related slow-downs or shut-downs, supply chain disruptions, or even from tremendous growth.  If you have found yourself in this position, you may have been urged to or required to get some help and may have been provided a list of names to call.  But how will you know who to choose? By cost? By personality? What qualities do you look for? It can be difficult to know what you need if you have never been in this situation before and the stakes are high.

 

The 5 Qualities


Core Values

A good financial advisor devises strategies to maximize the value of a company and proactively communicates a clear strategy and its benefits to each stakeholder. This will minimize unnecessary conflicts, which erode value through the consumption of time and money that could otherwise be allocated to value-creating activities. Ask potential advisors how they work with other stakeholders such as vendors, customers, employees, and lenders/investors.  Try to determine the advisor’s experience and likely credibility with each of these stakeholders.  See if their approach aligns with your values.

Experience
Navigating financial challenges involves more than financial models and analysis. A financial advisory firm should possess a breadth of business competencies and experience successfully guiding the business through the specific challenges you are experiencing.  Ask potential advisors about their experience with situations such as your own.  Ask for references.  Also, a financial advisor who has a team with real-world experience allows them to empathize with your challenges as they assist in developing and executing the best path forward.  So, make sure you ask about the experience of the people who will work on your project.

Capacity
Speaking of team, it is important to make sure your advisor has the capacity to support your business in the time frame you need them to. Make sure you clearly articulate what your expectations are and ask them to provide you a scope of work and timeline in writing.  Ask the potential advisor how they would support you if the timeline needed to be accelerated or the scope expanded.  Ask them if any additional resources would be brought in that were not part of the advisory firm’s normal staff.

Ability to Listen and Understand
Your financial advisor’s ability to listen and understand rather than talk over you with a lot of material is important. Their ego should be left at the door. They should be willing to listen to the issues you are facing and then develop a comprehensive plan to address these issues.  Does the financial advisor ask probing questions and listen to your answers?  Does the advisor speak in a language that is easy to understand and relate to?

Seeing the Bigger Picture
You need a financial advisor who can understand and frame the issues within your broader operations and mission. What other issues are there? What sub-issues exist? What are the goals? How will issues impact other stakeholders? Are the recommended solutions an approach that is sensitive to all stakeholders? Don’t win the battle – win the war. Make sure your advisor is asking questions that show they are focused on the overall business success and not just solving the immediate issue.

 

Choosing the right financial advisor can be intimidating and overwhelming but remember the five topics described in this article when you meet with potential advisors.  This can help you select an advisor who will best represent your interests in a way that is aligned with your core values.

 

All leaders experience performance challenges at some point over the life of their business. You are not alone. We can help. At DWH, we’re here for you. Feel free to reach out for a conversation on how we can be of assistance as you focus on thriving and not just surviving.

 


This post was written by Heather Gardner
hgardner@dwhcorp.com | LinkedIn

All companies experience change.
Plan for it with us.

 

 

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: 4 Qualities to Look For When Selecting a Financial Advisor to Super Charge Your Business Results

Understanding Your Cash Conversion Cycle

Individual pointing to blog on laptop

CCC: What is it?

The Cash Conversion Cycle (“CCC”) is an important metric used to determine the number of days it takes a company to convert cash outflows (purchase of inventory, manufacturing expenses, etc.) into cash inflows (collections of receivables).  The longer a company’s CCC, the more working capital it will need to fund operations.  This metric is especially important when a company is evaluating the working capital needed to fund expansions, new projects, or growth.

How is it measured?

There are three components of the CCC. They include Days Inventory Outstanding (DIO), Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO).  The formulas for determining these are below:

  • DIO = (Average Inventory on Hand / Cost of Goods Sold) X Days in the Period*
  • DSO = (Average Accounts Receivable / Revenue) X Days in the Period
  • DPO = (Average Accounts Payable / Cost of Goods Sold) X Days in the Period

*Days in the Period are determined by what information you are using to do your calculation.  For example, if you were measuring your CCC using numbers that reflected an entire year, the period would be 365 days.  If you were measuring just a month, the period would be 30 days.

Once you have determined your DIO, DSO, and DPO, the formula for your CCC is: CCC = DIO + DSO – DPO

Example

Below is an example of the calculation for the CCC of a mid-sized manufacturing company.

How can I improve my CCC?

Improving your CCC means improving the efficiency with which your company converts inputs into cash.  Improving your CCC also frees up working capital or cash.  Have you heard the phrase “Cash is King?” Well, the CCC is how you ensure your business has enough cash when you need it most!

Understand your current state.

What is the first thing you do when you are about to embark on a new journey?  You look at a map and figure out where you are relative to where you want to be.  You will never be able to measure progress if you do not know your starting point.

Calculate the CCC for your company using the most recent financial data and the formulas provided earlier.  This is your, “You Are Here,” marker.

Can you recall a time in your company’s history when cash was NOT tight?  What was the CCC leading up to and during that period?  How does that compare to your current CCC?  How does your CCC compare to the standards within your industry? Use the answers to these questions to guide the goal-setting process.

Identify and quantify cash levers

As you begin to establish cash conversion goals, you will discover a variety of “levers” that can influence cash flow. Some common levers are listed below.

Sales & Marketing Levers

      • EARLY PAYMENTS: Will any of your customers offer accelerated payment terms? Offer early payment discounts, as necessary.
      • DEMAND PLANNING: Can you engage with your customers planning and purchasing departments to ensure you have access to the most reliable product demand information? Structure your agreements in ways that allow you to level load your operations.
      • DISCOUNTS AND PROMOTIONS: Do you have opportunities to offer discounts or promotions on slow-moving or obsolete inventory? Are there brokers available to provide immediate cash for this inventory?  Can any of this inventory be re-purposed for other sales channels or product lines?
      • SELLING EXCESS CAPACITY: What areas of the business have excess capacity? Use this information to offer discounted pricing as needed to fill this capacity.

Supply Chain Levers

      • EXTENDED PAYMENT TERMS: Request extended payment terms from your key vendors. Remove any early-pay discount programs as applicable.
      • MATERIAL LEAD TIMES: Evaluate long-lead material items, seeking alternate sources with shorter lead times, or assist your vendors in reducing these lead times.
      • OPTIMIZE ORDER SIZES: Review your planning and ordering process to ensure you are ordering in the most economical batch sizes.
      • OPTIMIZE ORDER TRIGGERS: Establish parameters around raw material on-hand quantities to prevent excessive buildup of inventory. Set up replenishment systems, or vendor-managed inventory systems that allow you to reduce your liabilities.

Production Levers

      • PRODUCTION LEAD TIMES: What are your internal production lead times for your highest-cost items? Look for bottlenecks in the process and find ways to eliminate this buildup of inventory.
      • MINIMIZE FINISHED GOODS INVENTORY: Establish parameters around finished goods inventory, highlighting areas where completed product is sitting on your shelf for more than a few days.
      • INCREASE THROUGHPUT: Are there bottlenecks in your production process? Use this to determine where you might need to add more capacity (human or capital resources).  Find equipment that is under-utilized, working with the sales team to bring in work that can fill this capacity.

Financing Levers

      • ASSET MANAGEMENT: What assets are available that can be used as collateral?
      • NEGOTIATE ADVANCE RATES: Negotiate with your bank to find the best inventory and receivable advance rates.
      • MICRO-MANAGE COLLECTION PROCESS: Maintain proper oversight over your AR collection process to limit past due invoices that might become ineligible.

Review this list and decide which levers are most relevant to your business.  Quantify the impact of each lever to determine the potential impact on cash conversion.

Make a plan

Decide on a goal and create a path that moves you toward that goal.  As with any good plan, make sure you have identified key milestones and assigned appropriate ownership to key elements of the plan.  Each element should relate to the identified levers.

Work the levers

This is the fun part! Work through all the levers you previously identified, adjusting your plan as more information is gathered and as progress is made.  Maintain clear and consistent communication within your team ensuring all opportunities are fully explored and executed.  Document and measure your progress along the way.

Repeat

As movement is made, priorities will change and new levers will come into play.  Re-establish your current state, set new goals and repeat the process.

Conclusion

Monitoring your cash flow can often be a daunting and nebulous task.  You can use the Cash Conversion Cycle measurement as a tool to objectively monitor your company’s effectiveness in managing cash.  Using the tools and steps above can help to significantly improve the liquidity of your business and reduce future risk.

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: The Underappreciated, but Powerful Financial Metric – The Cash Conversion Cycle

 

This post was written by:
Jeremy Cosby, Director, DWH
jcosby@dwhcorp.com | LinkedIn

 

DWH Partners with JACO Advisory Group

DWH + JACO Partnership

As of May 17, 2021, DWH and Ohio-based JACO Advisory Group have formed a strategic partnership to provide growth and transition services. Both companies remain focused on serving the needs of mid-market, closely-held, and family-owned businesses located in the Midwest, along with the financial institutions, and professional service providers that support them. The combined experience of the alliance’s directors gives them extensive experience in: 

• Automotive
• Aerospace
Distribution
Retail
Food Production
Nonprofits 

Now, with offices located in Grand Rapids, Detroit, and Columbus the DWH/JACO strategic alliance provides both companies with an expanded reach to better service clients located in America’s heartland.   

“We’ve been working with DWH on projects since 2014, and our core values are very closely aligned, establishing a formal strategic partnership with them was just a natural progression in what was already a long-term relationship.”
— Jeff Cope, JACO Managing Director

 

About DWH Corp.
Our philosophy focuses on recommending business and financial solutions that maximize value for owners, investors, employees, customers, suppliers, and the community. By maximizing value for all stakeholders – rather than simply protecting the interests of a select group – we deliver advisory solutions that are more comprehensive, more productive, and more focused on creating a stronger foundation for future business success.  

To learn more about DWH, visit www.dwhcorp.com

About JACO Advisory Group
JACO Advisory Group (JACO) is a management consulting and advisory firm, specializing in growth strategies and transition planning for mid-market, closely-held, and family-owned businesses.  They help clients with strategic planning, business development, operational performance, talent optimization, succession planning, and restructuring & turnaround management. JACO partners with and becomes an extension of every business they have the privilege of working with, providing critical support when needed.  

To learn more about JACO, visit www.jacoadvisorygroup.com

 

This post was written by:
Ben Borisch, Chief Operating Officer & Partner, DWH
bborisch@dwhcorp.com | LinkedIn