Consulting firms are also hired to improve the cash flow of the firm. It may be a part of attempts to save a failing business from bankruptcy or simply improve the returns for the shareholders. Improving the cash flow, liquidity requires a certain methodological approach. In this post, I will show you the main methods of how you can do that.
Why you were hired to improve the cash flow?
The first thing you have to do is to understand what the reason for the projects is. This will to a large extent define your course of action. Imagine that you have to move furniture out of the house. You will behave in one way if the family that has hired you are just moving to a larger house and in a totally different way if the house is on fire. If the house is on fire, you concentrate on speed. You are ok will breaking some chairs, dishes and maybe also leaving behind some worthless items like clothes. All that matters is speed and to save as much as possible. If on the other hand, you are just helping a family to move to a larger house the speed is not that important. What matters is to move everything to the new house without a scratch. Context matters.
The same is true if you have to improve the cash flow, liquidity of the firms. If the firm is about to go bankrupt you will be selling things at a much lower price (fire sale), making redundant 20-30% of the staff after 10 minutes analysis in Excel. On the other hand, if the firm is growing and you want only to make the cash flow even better then the decisions will take much longer and you will be testing every potential solution on a smaller scale.
Below a list of consulting projects during which you will be doing cash flow improvement with suggestions some practical tips:
- Turn around projects – it’s all about speed. On this sort of project, you will be taking no prisoners. The work is pretty hectic and you should be prepared for tough negotiations with banks, trade unions, suppliers, and customers. The purpose is to survive. You will be working 15 hours a day 7 days a week. Every dollar counts so you make fast decisions with little analysis.
- Performance improvement projects. Many firms do every 3-5 years a performance improvement project. Part of this project will be to look for opportunities to improve cash flow. During these projects, you have time to do an in-depth analysis and to pick the optimal position from the EBITDA and cash flow point of view. There will be obviously tradeoffs, but you will have time to discuss them with the Board of Directors and shareholders. Some performance improvement projects will be only concentrated on a specific business unit or area.
- Program Management after M&A. A lot of PE funds buy a firm by putting a lot of debt on the firm they have bought. This means that after the acquisition they may hire a consulting firm to find ways to squeeze more cash out of the firm. The aim during such projects is to improve the cash flow without jeopardizing the growth of revenues and EBITDA. In other words, you help them optimize the deal and increase the return for the PE.
- Post-merger integration. In some cases, the firm that acquires other businesses needs the help of a consulting firm to integrate the business that they have acquired. Part of the project will be around optimizing EBITDA. However, you will also have to devote some attention to improving the cash flow. It will help finance the whole acquisition.
- Due diligence done by banks (lenders). If a bank that has lent money to a firm cannot get their money back, may decide to hire a consulting firm to find ways to improve the cash flow. The aim is to help the firm generate more cash to pay back the loans. Some such projects will be similar to turn around projects. The other will be more like the performance improvement projects. It will depend on the general cash position of the firm
8 ways to improve the cash flow
Generally speaking, there 8 ways to improve your liquidity. You will most likely use a mix of those paths to achieve your goal. Some of the methods we will discuss are easy and give fast results whereas others are more long-term. Let’s briefly discuss them
- Reduce inventory. A lot of firms selling physical goods will have significant inventory on their hands. To operate your business you need not only inventory of finished goods, but also raw materials and work in progress. This is one of the biggest sources of fast cash. Below a short movie showing what methods you can use to achieve this goal:
- Reduce Receivables. Another way to improve your cash position is to work on making sure that you get the money faster. You can do it by renegotiating with your customers terms of payments or in some cases (for example in the case of consumer goods) going directly to the end-customer. Below a short movie showing what methods you can use to achieve this goal
- Improve Payables. Once you are done negotiating with the customer it’s time to talk with the suppliers. To have more cash on your hand you have to convince them to wait a bit longer for their money. There are also some other tricks that you can use: you can look for new suppliers, consolidate the existing suppliers, and use it as an excuse to get better payment terms. Some firms improve their payables by using consignment stock or reverse factoring. A lot can be achieved also by playing with the frequency of purchase and changing the moment of issuing invoices.
- Restructure Debt. The most difficult and time consuming will be the discussion with banks. Generally speaking, you can either convince them to change the schedule of payment and charge you a lower interest rate or you can look for other alternative ways of financing your firm. Below a short movie showing what methods you can use to achieve this goal
- Improve Margins & Revenues. Many firms that a lot can be achieved in terms of cash flow by improving the margins. If for example, you increase your prices this will help you get more money without investing more in working capital.
- Cut Costs & Improve Efficiency. In similar money, you can simply spend less. Get rid of the 10 different tastes of coffee that you offer your employees, cancel the subscription of software you don’t use, optimize the processes, and give up the office space you don’t need. Check our post on cutting costs. You will find there a lot of practical tips
- Revise Investments. Firms also spend a lot of money on investments. Therefore, it is a good idea to have a look at a list of investments that they plan to do and check whether they make sense or not. Generally, you will try to get rid of things that have a long payback time or negative NPV in the next 3-5 years. I would go a bit further and check the impact on the working capital. Some investments can look cheap but they may generate a lot of working capital. Below an example of analysis that I recommend doing for every investment in the investment plan:
- Strategic Moves. The final bridge that you may have to cross is to decide whether you should get rid of certain businesses. It’s better to sell 1 out of 4 business units that you run than to go under and lose everything. This move is extremely useful when the firm has been doing a lot of M&As. It works miracles also if the firm is vertically integrated. Selling some business units may help you save the whole company.
That’s in short. If you want to see how to do analysis related to cash flow improvement in Excel check my course Liquidity Management for Management Consultants & Managers. You will find there 5 hours of content packed with detailed frameworks, examples of analysis in Excel, and practical tips.
Check also the presentation below: