Like all businesses, private equity firms require access to readily available cash. you would like these funds to hide a spread of expenses, including short-term investments and current debts. When companies in your portfolio are successful, this is often rarely a problem . 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’ll release capital within struggling portfolio companies, allowing you to facilitate a rapid turnaround.
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1. specialise in Short-term Cash Management and Monitoring
Before attempting to initiate a serious financial restructuring, immediate focus must tend to the company’s short-term obligations. In other words, what proportion cash does the corporate got 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 main target can slowly shift from liquidity to solvency.
A team of business crisis consulting experts can assist you create a cash management and monitoring plan for the near future, focusing initially on properly allocating every dollar earned.
2. Use income Forecasting Tools
Are you unsure what proportion income the corporate will have access to over subsequent few weeks or months? Invest in income forecasting tools.
These automated tools are quicker and more precise than manual, administrative efforts. you’ll find a spread of money reporting solutions that collate data from a spread of touchpoints, including:
ERP systems
Bank transactions
Bank account statements
Data input from other business units
Using these tools, you’ll gain instant, real-time insights into the company’s cash requirements, also as their ability to satisfy them.
3. specialise in capital Management
As you’re employed to assist the corporate improve liquidity, it’s important to make sure current earnings are getting used to the simplest effect.
Managing capital means maintaining a sufficient balance between the company’s assets and liabilities. It requires keeping an in depth eye on three main components:
Accounts receivable
Accounts payable
Inventory levels
4. Renegotiate with Vendors and Lenders
Another step which will help release income is to contact the company’s vendors and lenders. Explain things and see if you’ll negotiate a lower rate or more favorable terms, even only for the short-term.
To make your case, it helps to possess a structured repayment plan in situ . Your lenders will got to see the steps you’ve got in situ to make sure the corporate doesn’t default their obligations.
5. Identify Debt Restructuring Opportunities
Debt restructuring can help companies avoid the danger of default and lower their overall debt payments. In most cases, this involves removing a replacement , overarching loan to assist pay off multiple creditors.
This can help struggling companies avoid bankruptcy and immediately improve their business income .
A consulting company can point you within the direction of the foremost valuable restructuring plans, also as advise you on their application.
6. Conduct a Collateral Assessment
When liquidity may be a concern, it’s important to know what proportion of a company’s assets are currently pledged as collateral for business loans.
A collateral assessment determines the fair market price of those assets. If the corporate was to default the loan, what proportion would they lose and what are the important risks involved in doing so? These details are essential to creating an informed breakthrough .
7. specialise in Capital Optimization
As with capital management, capital optimization means optimizing the balance between a company’s assets and liabilities. a couple of of the common steps include:
Collecting company background and key data
Reviewing the company’s capital program
Examining the steps within 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 guage the impact of a future event.
Though this step are often performed manually, automated platforms remove any guesswork and room for human error. These tools can assist you make informed decisions to guard a company’s financial stability during the restructuring process.
9. specialise in Contingency Planning and Bankruptcy Planning
Along with financial modeling, a comprehensive contingency plan can help a corporation 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 knowing conduct basic bankruptcy planning. within the event that a corporation is required to file for bankruptcy, pre-planning can help simplify the method . 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 assist you restore short-term liquidity for a struggling company. However, there are greater issues at play that caused cash stores to dry up within the first place.
To uncover these issues, we recommend that specialize in business process management or business process reengineering. Digging deep into the company’s core processes enables you to deal with the basis causes of poor performance, instead of continuing to react to the symptoms.
The key components of business process management include:
Analyzing current operations
Identifying pain points
Providing leadership and alter management support
Establishing process ownership
Defining clear roles and responsibilities
Reorganizing operational structures
Improving business processes to extend operational efficiency
When the important issues behind liquidity concerns come to light, companies can take the proper steps to make sure against a repeat problem.
Do You got to Take Immediate Action?
When a corporation in your portfolio is struggling to satisfy short-term income demands, immediate action is required. With the proper liquidity management practices, you’ll facilitate a business turnaround.
In addition to addressing the immediate issue, engaging in business process management can assist you address the underlying issues that catalyzed the cash shortage within the first place. With this approach, you’ll set each company in your portfolio up for continued, long-term success.
Click here to know more about Hult private capital.