These are trying days for many Canadian organizations. Few in stress or distress have the luxury of time to turn things around. For many, surviving beyond the first half of 2021 will require immediate analysis, timely strategies, and impactful solutions to protect their financial position.
While situations can appear particularly challenging, there are quick and effective ways to free up cash, boost EBITDA, and explore financial restructuring opportunities. This applies to businesses that are approaching a critical transaction (e.g., the sale or purchase of a company) and those which are running out of time to get back on course.
When the clock is ticking
Time-critical challenges require a time-critical approach. This is where data analytics, industry insights, and rapid performance improvement (RPIs) assessments can uncover opportunities that spark significant upside EBITDA and cash release opportunities.
These opportunities tend to be found across four main business areas:
- Direct procurement: Procurement can account for at least 50 to 60% of a business's revenue. Still, it is not uncommon to find the procurement function somewhat understaffed or lacking the skills to extract full value from the business's suppliers. To that end, there is value in assessing direct procurement functions to determine if they are using the most effective tools and methodologies to extract optimal value by considering make vs. buy, low-cost sourcing, and dynamic pricing strategies.
- Back office: Back office and indirect activities often account for up to (and sometimes more than) 20% of a business's revenue and are considered a significant category of spend. This makes it a department primed for cost reductions, performance improvements, and adjustments to "right-size" back-office functions to fit the organization's current needs. To that end, it pays to take a deep dive into the different functions and review spending, process inefficiency, and IT (as a cost or an enabler) to deliver quick upsides.
- Core operations: This describes how a company's workforce is managed. Factors such as shift and overtime premiums or workforce scheduling can impact profitability, as can production delays, waste, and non-conformance to standards. It is important to move more of the core operations from "red" to "green" or, in other words, from "value leaking" to "value adding."
- Product and service profitability: Getting a clear understanding of the true profitability of products and services is fundamental. Doing so means conducting an honest and accurate assessment to determine how the company creates or erodes value. Correctly allocating the organization's resources and costs appropriately often shines a light on less profitable customers and loss-making products or services.
Working capital and cost optimization upsides can be found within each of these core areas. To that end, there is value in assessing the amount of cash tied up in accounts payable, accounts receivable, and inventory since quick cash release can help fund change in other areas.
Rapid performance improvement – the right mindset
Gaining actionable insights and pin-pointing upsides is only step one. The next is taking implementation action. A structured RPI process helps understand the current state and potential upsides across all areas of a business. That may entail restructuring costs, new IT spends, expansion initiatives, and other actions that will draw immediate upsides for businesses that deliver benefit.
RPI assessments are also be used in buy and sell-side situations in the early stages of a potential transaction. Given the impact of COVID-19, however, they are proving very beneficial in helping businesses survive beyond today's challenges. In a time where many companies are facing a serious risk of being unprofitable for an extended period, timely and sustainable changes will matter.
Financial restructuring and managing liquidity
Course correction may also require organizations to explore their cash management and cash maximization strategies and explore ways to better manage their creditors and overall liquidity. This can even be a strategy for businesses that are profitable but wish to reduce their debt service costs and speed up the cash conversion cycle.
For example, many of our clients seek to review their transactional-level data and uncover working capital savings opportunities that will have a genuine and timely impact on their finances. With these insights, leadership and decision-makers can move forward in designing plans that will put those opportunities to action and unlock cash for the organization.
Distressed situations may also require a review of strategic alternatives. There is a benefit to reviewing and evaluating a business' current debt structure, financial forecasts, and potential financing requirements in order to surface debt restructuring alternatives and inform lender negotiations. In some cases, the final decision may be to restructure or sell the business, in which case businesses can work with external specialists to assess execution risks, manage stakeholders, and drive negotiations.
When it comes down to restructuring the business or making bold changes, there are options. Pursuing those options, however, requires a comprehensive review of current activity and tailored strategies.
A time to act
2020 was an extremely difficult year for business leaders. Conditions are likely to remain challenging well into 2021, where it can be tempting to simply cut expenses and hope for the best. That said, business leaders who choose to "wait it out" risk missing their window to make time-critical and big-impact changes that are both necessary and urgent.
Moving a business out of stress or distress and back into control is about quickly developing a plan that looks beyond immediate obstacles. It's about using data and market insights to create a turnaround/recovery plan that won't just help an organization survive but provide step changes that will give it a realistic chance of thriving in the new landscape ahead.
About the authors
Gary Turner is a partner with KPMG in Canada's Operations M&A practice with a focus on performance improvement and operational components of transactions.
Anamika Gadia is a partner in KPMG's Restructuring & Turnaround practice in Toronto, and specializes in providing turnaround and restructuring advice to companies and their stakeholders.
Whether it is striving to maximizing your exit value, operationally assessing a business before a transaction, or driving overall business performance improvement at high speed – KPMG can help explore the various options on hand. We do so by conducting rapid assessments or diagnostics followed by a carefully considered, strategic approach.
Contact us to learn more about how we can help you quickly identify and implement performance improvements for your business.