No Regrets: Navigating Liquidity Management and Fostering a Cash Culture

December 15, 2023 00:23:00
No Regrets: Navigating Liquidity Management and Fostering a Cash Culture
Alvarez & Marsal Conversation With
No Regrets: Navigating Liquidity Management and Fostering a Cash Culture

Dec 15 2023 | 00:23:00

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Show Notes

Welcome to the No Regrets Podcast series featuring Director Cailin Boulerice in conversation with Managing Directors Markus Lahrkamp and Charles Lowery. In this episode, they dive into the importance of liquidity management and fostering a cash culture. Markus and Charles share actual insights that private equity fund sponsors and portfolio company management teams should be implementing now.

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Episode Transcript

[00:00:03] Speaker A: Welcome to a M conversation with a show where Alvarez and Marsal leaders discuss the trends impacting business today. [00:00:14] Speaker B: Welcome to this episode of a M's conversations with my name is Kaylin Bolaris and I'm a director in our private equity services practice at a M. I'm joined today by two of our managing directors, Marcus Larkamp and Chuck Lowry, from our commercial operations and CFO services practices. I've collaborated with both of these leaders on prior engagements with our private equity clients and have witnessed the magic firsthand that can happen when operations and finance teams work in unison towards a common goal. In our first edition of the no Regrets podcast series, we will talk through the importance of liquidity management and fostering a cash culture. We will hear from Marcus and Chuck on how to keep this mindset at the forefront and talk through actionable insights that private equity fund sponsors and portfolio company management teams should be thinking about and taking. Marcus and Chuck, you've worked together closely for a while now. Can you talk about how your relationship came about and the value you've been able to create for your clients over the years? [00:01:11] Speaker C: Thank you. Kaylin and I'd probably not talk about our relationship. Chuck and I worked together at what I would call very stressed company, private equity owned company that not only did it have EBITDA problems, but it also turned out very quickly that it had severe liquidity problems. So Jacques and I were tasked at the company to work with the management team to turn the situation around. And while I focus on the performance improvement, it was a global company, worked on everything from margin management to cost optimization to sourcing distribution. Chuck was in charge of the finances and ultimately also became the interim CFO of the company. And he can talk probably a little bit better about how severe it was, but it was a very intense time and I got to know Chuck very well. I got to know his capabilities and also the power of how cash management and performance improvement, how it can be a winning combination. [00:02:37] Speaker D: Chuck yeah, thank you Marcus for those kind words. And Kaylin, thanks for being here. One of the magic parts of this is they called us up in time. We don't have a time machine. We can't go back and fix stuff. Right. The PE and the management team called us with time to allow operations to do a bunch of really cool stuff around margin management and cost takeout and managing customers and all that sort of stuff. At the end of the day, if you can fix all that, right, the liquidity stuff becomes much easier. So I did focus on liquidity and early on we really had to manage through, think through. Where would the capex be? Where did we want to spend the money that we did have? We had to work with the banks and put a plan in front of them that made sense and was executable, which we did. And I thought it was just a best practice in how you work together with Ops and finance together. [00:03:50] Speaker C: And maybe, as an example, again, there was a very long list of performance improvement opportunities. But what Chuck really helped with is we have to prioritize. We cannot do everything. I mean, there were initiatives that would not lead to any kind of, like cash improvements or EBITDA improvements for the next three months. We deprioritized. We prioritized the ones where we saw a relatively quick return on ROI, on EBITDA and cash, and focus on the stuff that really moved the needle very quickly. And that's very important, particularly in today's time, where we are living in a very high interest rate environment with debt services that are just crushing even good and well performing companies. And at that point, you have to prioritize. And Chuck's work actually allowed us to really focus on the stuff that mattered. That mattered. And that quickly yielded into cash and EBITDA improvements. Yeah. [00:05:20] Speaker D: The culture of our firm, as you know, Kaylin is cash is king, right? If you run out of cash, not many good things can happen. And so we were very focused on liquidity. That didn't mean we didn't look down the road at things that we could invest in, but you still have to prioritize that. Right. And what Marcus's team was able to do is sort of weed through the fog, or see through the fog and be able to see what was really going to work, what was going to really generate results and what wasn't. So finance could trust ops, knew exactly where to go. And that makes protization infinitely easier than having to kind of work through that yourself as a CFO. [00:06:13] Speaker B: Absolutely. You mentioned culture at our firm. Oftentimes when we jump into the portfolio companies at our clients, we face different cultures. And instilling that cash culture that we value so much at a m is so important for our clients as well. Why do you think that cultural shift in mindset is crucial in the current economic circumstances that we're facing? [00:06:41] Speaker D: I would start with most management teams are used to earnings being incented by earnings, right? Reward and recognition drives behavior, and most companies are incented by earnings. With earnings as your goal and EBITDA is your goal, you don't have a focus on working capital management necessarily and the cost of capex and some of these other things that use cash, these things in the banking community, some call add backs, right? You can add back yourself out of business if you're not careful. I think management gets focused on earnings and making their numbers year to year, and there's a lot to be said for that. But as things know, as in some of the portfolio companies Marcus and I work with, two thirds of their EBITDA or more is wrapped up in paying interest. Cash interest. Right. As that tightens, you've got to focus as much on how do I manage my cash so I can get through these tough times as you do, just generating profit. [00:07:56] Speaker C: And what we see is typically that the shift from growth oriented management teams to cash oriented management teams needs to happen very quickly because of external factors, like, for example, the interest rate environment that we're facing now versus in 2021 and 2022, it was still okay. I mean, companies that were making decent EBITDA had no issues. They do have issues. So that conversion from a growth oriented mentality, where you spend money, where you are ultimately dipping into the EBITDA to fund growth initiatives, and then all of a sudden, you're short of cash, that conversion needs to happen, and it will also reprioritize a lot of the initiatives. Growth is not as important as pure survival at that point. So you got to change into more a cost focus and also ultimately into a cash focus. Cash is, like Chuck mentioned, is a currency. You cannot lie about EBITDA. You have addbacks. You can do all kind of, like, interesting things with EBITDA. Cash, you cannot. And cash is a hard currency. And when cash comes on the mean, you cannot lie about it. You have to kind of like, at that point, look at what do we have, what are we going to have and how much can we spend? And that is the discipline that we see that needs to happen in a lot of situations. [00:09:50] Speaker D: Right now, high water covers all the rocks, right? So it's a whole different ballgame to have a management team growing the company quickly in a positive environment with essentially no cost of debt, in a covenant free environment. And then all of a sudden, the water level drops and you're really having to navigate through some tough stuff. That's a whole different. And some management teams can't make that change. Some can. Right? But it takes a lot of focus. I would say it takes a lot of planning. The way you do if you're in a roll up sort of environment, the way you think about roll ups is way different. Going into a cash constrained environment than you would be if you're flush with cash, debt is essentially free and you don't have covenants. [00:10:48] Speaker B: Yeah. How important do you think in these uncertain times? You both mentioned the interest rate environment taking a major toll on our clients. I think it's taken a major toll on the deal making environment where we're having to look inward versus outward with the investments that we have. How important is it for the leaders of these businesses to make decisions and act quickly? What's your perspective on that? [00:11:15] Speaker C: It is absolutely crucial to make decisions. I mean, this is not the time where you can wait and see and hope. This is the time where you have to act, because any indecision that you have or inactivity that you have may actually hurt you relatively quickly, because, again, debt service has to be met. If you don't meet debt service, you're already in trouble. Now, you may not breach covenants because you may not have one, but guess what? You're running out of cash. And at that point, you have to absolutely make decisions and you have to make the right decisions. And you have to also, again, prioritize. Sometimes you may have to let go of a very cool growth initiative. For a cost initiative that yields you better cash in the short term. Keep in mind, it's all about survival. The good thing is these times are relatively, it's 1218 months that you have to go through those, and then it usually gets better at that point. If you survive this, that means also in a better, much better position. Chuck and I have worked with a company that we mentioned before where we initially met that company, once it came out of the cash drill, it was one of the market leaders in their space, and they owned the market, and it did phenomenal for a long, long time. So companies that survive during these difficult times are also very often seen as market leaders going forward. [00:13:02] Speaker D: Yeah, I'm not an economist, and I don't play on one tv. Right. But I would say these times of high interest rates are not going away anytime soon. I could be proven wrong tomorrow. Right. But I don't think. But even if I am wrong, I think management teams have to manage through it as if they are not going away. And then what Marcus said, right. On the other side of this, I'm lean in the back office. I'm focused on high return items. The company is very cash focused, frugal in the way they think about things. That's worth a lot. On the other side of this, even if I am wrong. [00:13:52] Speaker B: What are some common tools or best practices that you and your teams are using right now to solve for some of these problems. Just thinking about our listeners and tactical ways to approach some of this. Are there any success stories lately with tools that have been implemented with our clients? [00:14:15] Speaker D: Marcus was going to talk about just really cool rapid results tools, but I think generally when you call me, it's a liquidity assessment of some sort. So if it's completely a place where the company is really struggling now, we'll bring in a detailed sources and uses 13 week cash forecast model and we'll look at it. We usually triangulate that, leveraging an indirect model, so using earnings and balance sheet to look out over the next couple of years and see what's going to happen. Because given seasonality, even if there's not a 13 week problem tomorrow, there could be a problem in six months or a year. We'll look at what's draining cash or driving cash, and we'll work hard to try to put a plan together to optimize the cash today. With that said, we frequently work with Marcus on the operational side. If 70% of the costs are going through Ops, right, or more, then you've got to address that. And Marcus is a team in a way methodology to evaluate that. [00:15:48] Speaker C: To Chuck's point, cash is king in these situations, 13 weeks cash flow has to kind of be almost kind of like the guiding principle and the guidepost for a company. From an operational perspective. We integrate with very strict KPI management and also with prioritization of initiatives. We have a product, Chuck just mentioned it. It's called rapid results that quickly identifies performance improvement opportunities, prioritizes them, and then they fit in into the 13 week schedule so that Chuck can see, for example, in the 13 weeks cash flow. Hey, this is coming rapidly and it may actually help the situation if we have a short term liquidity outflow and so on. So the key is that it's all driven into a very strict cash management. And again, it is so important that cash culture, cash tools, KPI management are being implemented, because if you lose focus of this, you may get into big, big surprises. And that it is happening is when you run out of cash, you can go to your sponsor and ask for more money. The banks are typically not very comforting in this situation, and so you better be prepared and you better be ahead of the curve in terms of addressing what you may be facing. [00:17:35] Speaker D: The liquidity management tools, there are levers that you can pull that will help you generate cash. And if the issue is short term or temporary, you can just skate through and maybe you resolve your problem, but at the end of the day, you've got to fix the underlying problem. And that's going to be an ops, right. It's going to be in sales. Maybe there's some GNA, right. The big levers from really changing the company on a permanent basis is, I think, an ops in sales, though. [00:18:13] Speaker B: That's super helpful. I think we've heard a lot of great takeaways so far. I mean, cash culture has to be emphasized from the top down, and KPIs and comp plans and goals can be reshaped to measure towards those metrics, to align the behaviors to the incentives. And we heard a bit about shrinking to grow. And revenue doesn't always translate into profitability and liquidity, and cash is king in this environment. I think we also talked about private equity funds turning their gaze a bit inward versus outward and really shifting that mindset to operations and liquidity management instead of the deal making that we've seen over the last several years. And I think to close it off, the having the no regrets mindset, leaning into decision making during these challenging conditions and high rate environments is really better than making no decision at all, which, Marcus, you touched on. It can often be worse just sitting there stagnant than making the wrong decision. I did want to make sure we covered any other key themes before we wrap up that we may have missed on just what our management teams of the portfolio companies out there and the PE fund should be thinking about. [00:19:26] Speaker C: Yeah, Kellyn. I mean, this was a great summary. I think one thing that we sometimes also forget is next to the cash culture that needs to be promoted in these situations is also transparency. You have to have transparency with all stakeholders, that is with the lenders, with the private equity, and also with the employees. Sometimes it's very difficult to convince a management team of, okay, we're going to go into a cash drill because they are afraid that the employees will ultimately leave. The better ones will leave. It is actually the opposite. Employees appreciate being part of the solution and you got to be very transparent. And in my eyes, and that has worked very well also, they also need to be incentivized to do this. Now, cash is short, maybe short, but once you come out on the other end to have incentives also that ultimately help with that cash culture are also things that we promote in our business. But transparency is key. All stakeholders need to be on the same page and need to be sailing in the same direction. Otherwise you're going to be facing very adverse consequences. [00:21:07] Speaker D: Yeah, that's great. I will say time is not your friend in this situation. If you wait, quarter goes by, quarter goes those quarters you may have needed and you can't get them back. So the board and management need to be well ahead of this and thinking through plans that address the situation sooner rather than later. And with that said, board and management need to be on the same team. I've seen frequently where the board, the sponsors in management are at odds. Things aren't in a great spot between them, and it's impossible, as we know, to win when the team isn't all rowing in the same direction. So I think that obligation is on the board and the chairman to really work to make sure management understands its support and that they're all on the same page as to what actions need to be taken. [00:22:22] Speaker B: Yeah, that's super helpful. That's great advice. I think we covered a lot of ground during this episode and have a lot of great takeaways for the audience. And in the rest of the series we'll be tackling more topics in this area, but really appreciate the time, Marcus and Chuck, and all the years of experience and advice that you've provided to the group. [00:22:44] Speaker A: Thank you for listening. Make sure to subscribe to the show so you never miss a new episode. Visit our website Alvarez and Marsal to learn more and to connect with us.

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