The typical reaction when a Texas business stops paying employees on time, falls behind on vendor payments, or burns through its cash reserves at a rate that is faster than it can be replaced, is to try harder to generate more sales or hope that conditions will improve by next quarter. But this approach is unlikely to resolve the underlying problems.

Stabilizing cash flow and then restructuring the company’s cash requirements, or obligations, are the foundational steps to a successful turnaround. Stabilizing cash flow allows a company to arrest the decline, pay down short-term debts, and increase cash balances, or liquidity.

A distressed mid-market Texas business owner in the Dallas–Fort Worth, Houston, Austin, and San Antonio metro areas will find that stabilizing cash flow prior to the onset of a crisis can be a crucial element in determining whether the business will undergo a controlled restructuring or be subject to forced liquidation.

Step One: Assessing The Company’s Current Financial Position

Stabilizing cash flow begins with an understanding of the company’s current financial position. To be effective, the assessment must be done on a frequent basis. The questions that need to be answered are simple but fundamental: How much cash does the company have? At what rate is it being consumed? What cash is coming in during the next 13 weeks?

A 13-week cash flow projection is an accurate picture of the company’s incoming and outgoing cash on a weekly basis and provides information that is usually absent from monthly financial reporting. The 13-week cash flow should take into account several factors:

  • Accounts receivable balances and likelihood of collection.
  • Accounts payable balances and prioritization of payments.
  • Debt service due and potential covenant breaches.
  • Net cash outflow during any given week.

An interim chief financial officer (CFO) or chief restructuring officer (CRO) with experience in corporate turnarounds will be able to prepare a 13-week cash flow within two weeks and share this information with the board of directors and major stakeholders.

Stop The Bleeding

Stabilizing cash flow begins with stopping the bleed. The company’s leadership should immediately look at implementing cost-saving measures to slow down cash consumption. Some common actions taken include:

  • Discretionary spending freeze. Many companies implement a spending freeze that cuts down or eliminates discretionary expenditures such as travel, capital investments, and additional staffing. This is the fastest way to stop the hemorrhaging of cash.
  • Vendor payment stretching. The company should also look at renegotiating terms and delaying payments to vendors. Payments to vendors essential to business operations should be prioritized. The company should delay making payments to less important vendors or seek to negotiate extended payment terms.
  • Accelerating accounts receivable collections. Promptly collecting outstanding invoices, offering customers discounts for early payment, or selling some or all of the company’s outstanding accounts receivable to a third party are ways to get cash sooner.
  • Liquidating assets. The company should consider selling off assets that are not being used in the normal course of business, such as excess inventory, unused equipment, or vacant office space. Selling these assets will generate immediate cash without incurring additional debt.
  • Reducing the headcount. A reduction in force is usually a last resort for a distressed company, but it may be necessary if the company needs to operate with fewer employees than are currently employed. However, this measure should only be implemented if there are enough employees to support ongoing operations and recoveries.

To ensure that these changes are executed promptly and objectively, an independent interim CFO or CRO should implement them and make recommendations to the board of directors.

Reorganizing the Company’s Obligations

Stopping the bleed is just a temporary measure. If the company is to continue operating, the company’s cash requirements must be restructured to allow the business sufficient breathing room. Restructuring the company’s cash obligations involves:

  • Out-of-court workouts. A large percentage of Texas mid-market businesses do not enter bankruptcy. Instead, they work out their cash flow problems with their lenders and other creditors out of court. An out-of-court workout provides a mechanism for restructuring the company’s cash obligations without going through the expensive process of a bankruptcy proceeding. The company can seek to negotiate with its lenders to extend the time for repayment, reduce the total amount owed, or amend the terms of the loan.
  • Refinancing the company’s debt. In some instances, the company may be able to refinance its existing debt with the original lender by modifying the terms. The lender may be willing to accept extended repayment terms, lower interest rates, or other concessions. Lenders will be more receptive to these types of modifications if the company is run by a management team with extensive turnaround experience.
  • Filing a Chapter 11 bankruptcy petition. A Chapter 11 bankruptcy is available for businesses seeking to reorganize their debt obligations. The automatic stay will stop creditor collection efforts; DIP financing, section 363 asset sales, and plan confirmation may provide a way forward.

Stakeholder Communication: Trust Is Currency

Communication with stakeholders is often overlooked in a distressed situation. Without active communication, fear arises. Lenders, vendors, and employees may then protect themselves, making the situation worse. Effective stakeholder communication includes:

  • Proactive communication with lenders providing accurate cash flow information, turnaround progress, and milestones.
  • Transparent communication with key vendors regarding when they will be paid and the plan to pay all obligations.
  • Internal communication ensuring key employees have visibility into the plan and their roles.
  • Board and ownership alignment on key decisions, including whether additional capital is needed and ownership dilution.

An experienced interim CFO or restructuring advisor is able to communicate with lenders, creditors, the board of directors, and the court in a credible manner while maintaining confidence in the turnaround effort.

Interim CFO for Cash Flow Stabilization

An experienced interim financial leader can be very effective in many situations.

  • Objectivity. External leaders have no internal politics. They can reduce costs, restructure debt, or exit a loss-making product line.
  • Stakeholder credibility. Lenders, creditors, and courts respond well to experienced financial leaders with demonstrated turnaround experience and professional credentials.
  • Speed. Experienced interim financial leaders know what needs to be done first. What would take an internal team months to accomplish can often be compressed into a matter of weeks.
  • Fiduciary perspective. A financial leader with experience in restructuring, litigation, and fiduciary responsibilities provides the kind of governance experience that stakeholders and courts respect.

Frequently Asked Questions

How soon can we implement a cash flow stabilization plan?

A rapid diagnostic can usually be accomplished within two weeks while immediately taking action to preserve the remaining cash. A full turnaround plan may require 30-90 days of negotiation and work with creditors to restructure debt.

When should I engage an interim CFO or restructuring advisor?

Much sooner than you think. If revenue is relatively stable but cash is decreasing, if the company is relying on reserve balances and credit lines to pay routine expenses, if there is lender covenant pressure, or if vendor payments are late, it is time to bring in experienced financial leadership. It is much better to engage before the next payroll cannot be paid or there is a default under loan covenants.

Will my lenders work with me in a restructuring?

Most of the time, yes, if there is active engagement and communication, credible financial information, and an achievable turnaround plan. Most lenders prefer to see a successful workout rather than liquidation, where their expected recovery is often lower.

Is cash flow stabilization always accompanied by a bankruptcy filing?

Not necessarily. Many successful turnarounds do not involve a bankruptcy filing. A business can be stabilized through an out-of-court workout, debt restructuring, and operational improvement. A Chapter 11 case is just one of several tools available.

What is the cost of engaging a restructuring advisor or interim CFO?

The cost varies based on the scope and complexity of the work required, but the important consideration is the cost of not doing anything. With each passing week without a turnaround plan, the number of options is likely to decrease and the overall cost of recovery increases.

Conclusion

Cash flow stabilization is not the end of a turnaround. It is the start. A cash flow stabilization plan can stop the bleeding, restructure obligations, and restore liquidity. The result is a foundation for a distressed Texas business to continue operations and eventually recover value.

The first step is to get an honest, professional assessment of where the company is and what options are available. Time is of the essence. Every day that passes may reduce the available options.

If your business is facing cash flow pressure, lender covenant pressure, or other early warning signs of financial distress, call or email John Tittle, Jr. at tittlefinancial.com or (214) 341-6043 to schedule a confidential conversation. John has been a Deloitte partner, public company CFO, and a court qualified financial expert for over 35 years. He offers his experience and expertise to financially distressed businesses to help them stabilize, restructure, and recover.