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Surviving and thriving in a challenging environment:key areas of focus
Neil Honess
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Welcome
Neil HonessPartner, Restructuring & Turnaround, KPMG
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Agenda– Key areas of focus
- Cash management
- Understanding stakeholders’ needs
- Communications
– Conclusion and recommendations
Cash management
Key areas of focus
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
OverviewWhy focus on cash? Cash is key to survival and growth.
Invest in Capex
Avoid additional
financing
Increase value
ahead of a sale
Improve internal
processes
Release cash to
shareholders
Pay down debt
To run the
business
To invest
To upgrade
infrastructure
To satisfy
shareholders
To increase
valuationCASH
To satisfy lenders
Source: KPMG
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Easy moneyCash management and working capital are the easiest, cheapest and fastest sources of funds
Cash
Management
Working
Capital
Revenue
Optimization
Asset Sales
New Debt
New Equity
Cost
ReductionCo
mp
le
xity
an
d C
ost
Time
Source: KPMG
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Two key elements
Before you can improve
cash flows, you need to
understand them in detail
Cash flow forecast
Once you understand
your cash flows, you
can address the root
causes of working
capital inefficiency and
seek cost reduction
strategies
Working Capital
Improvement
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Forecasting: basicsThe concept of cash flow forecasting is easy to understand, but consistent execution is often difficult
Effective forecasters typically follow three basic principles:
1. Decisions
– You need a reason for forecasting: to make better business decisions
– Focus on information that will assist leaders to make decisions
2. Data
– Find a way to acquire and maintain accurate, relevant, and timely data that supports business
decisions. This will involve benchmarking, collaboration and teamwork
3. Discipline
– The forecasting discipline includes a commitment to managing the business in a forward-looking
manner, embedding the forecasting process in the organization and consistently using it as an
element of strategic decision making
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Forecasting: principlesPrinciples of a successful cash flow forecasting process:
– Proper set-up (e.g., templates, instructions, etc.)
– “Anchored” to a balance sheet with inputs received from the ‘owners’
– Ownership of inputs from appropriate parties
– Assumptions documented and challenged for reasonableness by appropriate management
– Variances to forecast explained
– A minimum of 13 weeks visibility, though this can be shortened as circumstances dictate
– Capable of being reconciled to the long-term cash flow forecast
– Preparation of a commentary covering key items and assumptions
– Sensible trade-offs between 100 % precision and timeliness of information
– Updated daily or weekly for actual performance and known changes to assumptions
– Full re-forecast following completion of monthly management accounts which provide new anchor points
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Forecasting: benefitsThe potential benefits of a short term cash flow forecast include:
– Identifies the key drivers of a company’s cash flow and highlights the controls needed to deliver
the forecast result
– Can undertake variance analysis of forecast vs actual and forecast vs reforecast
– Enables management to proactively manage cash flow, as they have visibility of potential issues
in advance
– A forecast identifies trends in the business and possible opportunities to drive out head-room
– A forecast is a key element of embedding a cash culture within a business
– Fundamentally sound forecasting process will be critical to developing and discussing options
with the lenders and/or other stakeholders (as further discussed herein)
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Working capital and cost reduction
– Develop a working relationship to enable management to work with a lender
– Demonstrate seriousness of management through aggressive attempt to create liquidity and
address the lender’s concerns
– Avoid, if at all possible, an additional ask from a lender
– Failing that demonstrate to a lender that company has tried everything
– Show stakeholders that the company is also looking to “share the pain”
– Companies should look to cut costs wherever possible at all times
– Undertake an holistic review of the business
Overview
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Working capital and cost reduction
Disposal of underused or redundant assets
Setting capital expenditure budget and plans
Maintenance of fixed assets
Tax
Accelerate the cash cycle
Reduce overdue debtors
Address root cause of customer disputes
Track customer patterns
Work with suppliers to minimise lead times
Standardize terms
Automate processes
Define inventory management strategies to reduce stock while increasing service level
Establish working capital dashboard to provide quality decision making information
Improve timing of supplier rebates e.g., volume rebates
Reduce prepayments
Fixed Assets
Property
DebtInter-company
Working capital
Reduce warehouse footprint through inventory management
Disposal of redundant or condensed property
Sale and leaseback
Minimal footprint
Reduce subsidiary funding
Accelerate management charges
Cash
Areas for consideration
Sales tax
Payroll tax
Corporate tax
Cash back opportunities e.g., research and development
Instalment payments
Defined Contribution vs. Defined Benefit
Source: KPMG
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Address liquidity concernsCreating liquidity under existing loan agreements
– Work with administrative agent and other lenders in advance of borrowing base redeterminations to help minimize
downward adjustments to borrowing base
– Amend loan agreements to temporarily waive financial covenants and extend maturity dates
– Lock in commodity hedges at values higher than the price deck used by lenders
Reduce existing capital expenditures budget
– Possible to the extent that failure to invest capex does not jeopardize existing borrowing base assets
Identify new sources of liquidity
– Sell redundant or surplus assets
– Monetize current assets through conveyances of royalty interests and production payments
– Monetize hedges where value of hedges exceeds their incremental borrowing base credit
– Holistic approach to consider all aspects of the business
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
A culture of continuous improvementPerception Reality
– Working capital is solely a finance issue
– Working capital can only be improved via a
system, or other long-term and complex changes
– Impacts customer service
– It is not strategic priority
– In fact it is at the heart of the company’s operations
and can be a leading indicator of economic
conditions
– Improvements are centered around the company’s
existing processes and procedures, so can often be
quickly implemented
– It actually helps to improve customer service via the
professional management of the business
(respecting contractual terms, on time delivery,
inventory management, etc.)
– For the best companies it is!
– The level of working capital is a by-product of
operational business performance, therefore excess
working capital suggests operational issues that also
impact cost and quality of offerings
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Cost ReductionAreas of opportunity to drive sustainable cost reduction
– Asset management: Work prioritization and work execution
– Field Operations: Streamline operations, remove discretionary spend, tighter expenditure
control, overhaul maintenance strategy
– Turnarounds: Planning, execution efficiency and contracting efficiency
– Procurement/Inventory: Materials/warehouse optimization and process improvement,
procurement review and improvement, renegotiate with suppliers
– Workforce: Headcount reduction, flexible working, streamlining back office support
– Customers: Review and renegotiation of contracts
Understanding stakeholders’ needs
Key areas of focus
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Overview– A lot of companies demonstrate an almost fundamental misunderstanding of their banking
relationship making it easy to lose support, and with it control
– Try and avoid their attention: how? By understanding what a lender’s key issues are
– Most lenders’ primary concern is “are management able to deal with current challenges?”
– Credibility can be enhanced through forecasting and communication
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Commonissues
Key issuesEarly assessment is critical as lenders will want to ensure pro-active
measures are implemented
Source: KPMG
Communication
Key areas of focus
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Overview– The most essential step that a
company in a time of stress can take
is to keep open lines of
communication
– Lenders are likely the most
immediately critical stakeholder –
but remember other stakeholders
– Messages must be timely,
consistent, accurate and realistic:
Lenders adopt a pretty strict “no
surprises” policy
– Surprising the lender should never
be an option!
Ensure messages are timely, consistent, accurate and realistic.Proactive communication strategy allows retention of control in
stressed situations
Customers
Employees
Suppliers/Creditors
Shareholders
LendersCompany
Source: KPMG
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Basics– Be pro-active in your communications if you are forecasting liquidity and/or covenant issues
– Take time to really understand your lender/lending syndicate (patient versus aggressive)
– Analyze various scenarios and options – go to the lenders with potential solutions not just issues
– Seek appropriate legal and financial advisory (if needed) advice in an attempt to maintain control of
the process
– Do not underestimate the time and resources that will be spent dealing with various stakeholders
during a potential restructuring
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Controlling the message
Source: KPMG
Conclusion andrecommendations
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Operating while determining options– It is important not to make misrepresentations to creditors/suppliers about the financial position of
the corporation
– Don’t over promise to stakeholders
– If stressed or distressed:
- Should not take any action either directly or indirectly to incur new obligations (other than
those arising by the mere passage of time) unless there are reasonable grounds for believing
that the corporation will be able to meet those obligations when they fall due;
- Should avoid increasing the aggregate amount of trade debt and other short-term liabilities
and also avoid making any one creditor worse off; and
- Obtain specialized legal and financial advice
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Do’s and Don’tsDo Don’t
– Ensure open and honest communication
with stakeholders
– Take time to understand stakeholders’
positions
– Analyze the business
– Improve cash management
– Seek appropriate professional advice
– Refuse to believe there is an issue.
– Adopt a “penny-wise, pound-foolish”
approach
– Misunderstand the relationship with lenders
and other stakeholders
– Ignore cash
– Seek external solutions first
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Key takeaways
Equals
– Cash management
– Plus understanding
– Plus communications
– Plus appropriate advice
– Better chance of keeping control of the situation
– Better chance of positioning company to survive and thrive
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Neil Honess
Partner
Restructuring & Turnaround
T: 403 691-8014
Contact Neil
Thank youDownload this presentation at:
kpmg.ca/ignite
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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