Working Capital – Business Owner’s Best Friend

Getting It • Keeping It • What happens when it’s gone

Working Capital – Business Owner’s Best Friend

Day in the Life of Crisis

Tremors • Quakes • Wobbles


Started 20 years ago and finally attained industry relevance

Home 10 years from being paid off – colleges saved for
Wife and 3 boys – somehow balanced 24/7 work ethic with family
Oldest in college – last few years spending more time with kids
Active contributor to community and schools

Perfect Storm

Surfing with no. 2 son in Mexico, VP Sales calls – largest customer is competitive bidding an alternative source due to non-performance
3 weeks ago, senior lender re-appraised inventory and advance rate was being decreased over next month by 10%
Main supplier, who is COD, wants to meet in 2 weeks to discuss past due balance
Lack of sufficient “A” inventory delaying shipments, decreasing fill rates and causing plant overtime and extra part-time help to ship orders
Competitors using rumors to create doubt with Customers and Suppliers

Welcome to Crisis

Daily cash meetings – what do we pay?
Supplier calls – juggling COD and wires to get inventory
Customer shipping decisions now based on creating invoices and discounting to get early collections
Senior lender wants cash flow plan, timely financial statements, and receivable, inventory and payables agings
Heavy overtime and stress on employees to source inventory and deal with vendors and customers
Employee morale low, highly stressed …. Are they looking?


Personal guarantees with lender, lease and equipment
Living on savings – business needs capital to make payroll and pay vendors
What do I tell family? Boys may have to go to state schools and have debt
I’m 50, if the business fails, who is going to hire me? Will I have to move?
What do I tell my associates and community?

Crisis – OK now what do I do?

Don’t Panic • You are not alone • Everyone has faced it

Move quickly and decisively
Precise contingency plan – create with and share with key managers
Act quickly and decisively
Don’t turn inward and hope goes away – now more than ever, must do what is necessary – not always what good at
Over communicate – don’t be afraid to share struggles – everyone knows
Marshall assets – sell excess inventory; discounts to collect receivables
Un-encumbered assets – source of capital
Meet with managers – redefine department tasks – eliminate head count
Meet with largest suppliers – try to get extended terms / payment plans
Senior Lender support – 13 week turnaround plan – define what company is doing (cuts, etc.) and what requesting from lender

Corporate Clock

Time Speeds Up • It’s a full-time job!

Corporate Clock

Best Defense: Managing Working Capital

Easy fixes • Begin Crisis-Proofing your Company

Need a great PLAN – key drivers – operational goals – projections
Can never run out of cash – must have weekly 13 week cash flow
Develop key indicators (KPI) worksheet – distributed regularly
Monthly reporting and variances to Plan and action items to correct
Involve ALL key managers in process – they must own it
Scalability – moving from fixed to variable cost model
Senior lender meetings: create confidence in ability to navigate – employee discipline – repetition of “good”
Create teams – empowerment – cross talking – immediate action
Don’t have to approve or control everything – become leader, not problem solver – must delegate and create a process
Continuous education of key employees – delegate, delegate, delegate
Where are you on this curve?

Company Life Cycle

Where are you on this curve?

Where are you vulnerable?

Working Capital Cycle

Where are you vulnerable?

How Much?

Factors affecting working capital

Factors affecting working capital

Manufacturing Highest

Production Cycle – How long?
Raw Material – Lead time?
Seasonality – On demand or build and hold?
Skilled Workers – On demand or keep?
Variable vs. Fixed Costs – Scalability?
Inventory – turns?
Factors affecting working capital

Distribution Medium

Sourcing – Lead time?
Seasonality – High / Lows?
Trade Terms – Overseas?
Customer Terms – Discounts?
Warehouse – 3 rd Party / flexible?
E Comm – in house / 3 rd party?
Inventory – Lead time?
Factors affecting working capital

Other thoughts

Business Cycle –

  • Up market – growth
  • Down market – cost cutting
  • Seasonal – cushion for swings
Fixed Overhead – 1 to 2 months?
Inventory – Sell off excess
Cap Ex – normal / new equip
Footprint – room for growth
Borrowing – room for growth
Trade – consignment / terms

How do I get it?

Senior Debt vs. Equity

Senior Debt

Term Loan:

  • Advantage – fixed debt svc.
  • Disadvantage – 100% drawn

Asset based loan:

  • Advantage – draw as needed; fast build up of available cash
  • Disadvantage – payback quickly as sales decline / offseason
  • Weekly borrowing base – costs


  • Advantage – simple formula
  • Disadvantage – borrowing costs; must payoff past due accounts


Secured sub-debt:

  • 2 part interest – pay and accrual
  • Residual equity amount
  • Looking for 18+% IRR


  • Control – % ownership
  • Board of Directors
  • Looking for 30+% IRR

Looking Bankable

Build Trust through Predictability and Visibility

Develop Comprehensive Business Plan:

Don’t assume bank knows your business – document needs to “travel”
3 Year Business Plan – define working capital need
Bridge past sales, margins and OPEX to Plan assumptions
Breakeven analysis and scalability
Customer profitability analysis

SWOT analysis (strengths-weaknesses-opportunities-threats)

Monthly Reporting:

2 years historical financials on accrual basis
Current YTD financials with budget variance analysis
Current year budget and working capital (cash) requirements
Aging of receivables and payables

Working Capital

What happens when things go wrong.


Covenant breaches
Declines in cash flow
Missing business plan
Increases in days payable
Loss of key customer/vendor
High turnover
Lender/vendors tightening terms
Transfer to special assets division
Write – downs
Failure to file financial statements
Significant litigation
Capital infusion by owner


Macro factors:
Declining consumer spending
Declining asset valuations
Regulatory change
Credit tightening
High commodity prices
Micro factors:
Ill – conceived acquisitions
Weak financial management
Poorly conceived strategy
Inability to execute


Insufficient Liquidity
Excessive Leverage

Case Study

Senior Debt

$15M Manufacturing Company:
Description: Privately owned manufacturer of commercial skylights. Asset-based line of credit.


Under-Bid on contract which doubled the design and production facilities
Losses and cycle between contract billings and costs forced default with lender
Inventory too high – overvalued (capitalized too much overhead)
Key vendors pushed past terms


Negotiated stand-still with senior lender and trade creditors
Stabilized cash flow and level loaded plant operations
Merged company with out-of-state strategic partner to bring adequate new capital


$50M Shoe Distributor:
Description: Private Equity owned designer and distributor of women’s shoes. UK office. Asset-based line of credit.


Competition reducing sales and margins
Traditional retail stores declines due to on-line retailing
Company’s downsizing efforts not deep enough to keep up
High cost of personnel due to design and marketing and sales focus
Equity owner reluctant to put in additional capital


Developed detail weekly operating plan and cash flow to stabilize company
Replaced senior lender in UK and US
Payment plans for key vendors
Merged company with largest China based manufacturer


$40M Temporary Staffing:
Description: Private Equity owned, multi-office provider of temporary personnel. Asset- based line of credit.


Heavily competitive market
Re-cooping from recession – limited working capital
40% of consultants full-time due to technical skill competency requirements
Equity owner reluctant to put in more capital


Developed detail weekly operating plan and cash flow to stabilize company
Decreased reliance on permanent consultants – decreased non-chargeable significantly
Closed unprofitable offices
Equity partner restructured investment