The interim manager was hired by a large joinery company that had run into financial difficulties. The company manufactures interior fittings. The main products are furniture, doors, windows, flooring and drywall construction. Outstanding customers are property management companies, industrial companies (annual contracts) and private customers. The company had twelve employees and an annual turnover of around 1.5 million euros.
Cancellation of overdraft facility averted for the time being in talks with the house bank
The company had invested heavily in recent years and had taken out large loans from banks, including state subsidies. The long-term debt was dramatized by a high and fully utilized overdraft facility. The uncontrolled slide into a critical situation was due, among other things, to a poor overview, incomplete control and contradictory communication on the part of the house bank and tax advisor.
At the end of August 2019, the company was still able to meet its obligations. However, it had earnings problems and was overindebted. The house bank threatened to cancel or significantly reduce the overdraft facility, which was vital to the company's survival. In a meeting, the interim manager was able to make a significant contribution to ensuring that the overdraft facility remained in place for the time being.
The parties agreed to wait until January 2020 for the results of the ongoing consultation. Until then, the interim manager was to present a concept for the future of the company, which included integrated financial planning, continuous liquidity control and optimization of the financing structure.
Analysis revealed a lack of controlling of turnover and costs
The interim manager gained a comprehensive picture of the current financial situation based on the annual financial statements for 2016 to 2018 and the business management analyses (BWA July 2019). Explanations from the management rounded off the picture. After a fairly successful 2017, the company had to cope with a very difficult 2018. Among other things, this was due to a lack of sales and cost controlling. A lot of work was carried out for property developers in 2018 (and 2019). This resulted in payment defaults, late payments and poor earnings. In addition, the financial difficulties were due to the fact that the tax consultant had only provided the 2018 annual financial statements in July 2019 and the company therefore only found out about its over-indebtedness late.
Debt burden and financing costs were only one cause of the crisis
The company had only been able to make significant investments in buildings, machinery and operating and office equipment by taking out loans totalling well over one million euros. Added to this were the costs for the intensive use of the overdraft facility. This resulted in an interest burden for 2019, although this alone did not yet have a fatal impact on profitability. However, the high repayments placed a heavy burden on liquidity. As the interim manager's analysis revealed, the considerable debt burden and financing costs were only one cause of the imbalance.
Uncontrolled development of services and costs identified as the core
The key cause of the problems was the uncontrolled development of services and costs and the failure to make adjustments. Total operating performance fell by four percent in 2018 compared to the previous year. At the same time, expenses for materials (plus twelve percent) and personnel (plus 15 percent) had risen sharply.
Liquidity difficulties unforeseeable without professional financial planning
As there was no medium-term financial planning for the next twelve months and the following two to four years, forward-looking planning and control of turnover and costs, and therefore earnings, were not possible. The company was practically flying blind. In addition, there was no professional liquidity forecast covering four weeks and two months. As a result, liquidity gaps were almost impossible to predict and the company was at the mercy of the overdraft facility and its house bank. The assessment of whether the money would still be sufficient in the near future was made - if at all - roughly according to the account balance and expected incoming and outgoing payments, based on empirical values.
The full extent of the situation only became apparent in July 2019, when the tax advisor provided the annual financial statements for 2018. After discussions with the bank, it was clear that something had to be done, especially as there was no strategy for the future of the company - and therefore no perspective on how to proceed.
Recommendations for sustainable restructuring developed
On the whole, the analysis revealed a company in serious difficulties. Against this background, the interim manager developed the restructuring concept, which focused primarily on recommendations for action for the following components:
- Liquidity planning and control
- Concept for the future of the business
- Medium-term financial planning, based on the concept
- Optimization of the financing structure
- Collaboration with external partners
Regular liquidity planning and control
The company was still solvent on time and in full according to the current liquidity forecast under the overdraft facility. This was to be monitored in the long term. If necessary, measures had to be taken to ensure liquidity. The forecast had to be reviewed and adjusted regularly every week for the next four weeks and the following two months in line with current developments. In addition, potential cost savings had to be identified and realized on an ongoing basis.
Creating a concept for the future of the business
Restructuring only becomes robust when turnover increases by around 50 percent per year. The capacities (personnel) had to be made available for this. At the same time, based on the higher purchasing volume, more favorable prices and delivery conditions were to be negotiated with the material suppliers. The interim manager suggested this with his concept for the future of the company:
- Select key growth areas (products, customers)
- Estimate the annual turnover and growth rates in the respective product areas
- Determine the necessary capacity and provision
- Appoint a deputy for the managing director, with a defined area of responsibility
- Marketing and sales measures in selected channels
Medium-term financial planning and control
- Revenue forecast for the next twelve months and the next four years
- Cost forecast for materials, personnel, investments, operating and office equipment, materials and services, financing costs. In particular, the aim should be to significantly reduce material costs as the largest cost item.
- Calculate business success
- Liquidity development (monthly and annually) plan: incoming payments less outgoing payments, identify surplus/shortfall, cover cash requirements
- Capital requirement determination resulted from liquidity planning in the liquidity overview. In view of the use of factoring and goods purchase financing, the use of the overdraft facility was further reduced as the business grew.
- Ensure solvency : check incoming and outgoing payments for the next four weeks and the following two months on a weekly basis; ensure punctual payment of invoices; if necessary, take measures to pay invoiced sales earlier or to postpone invoice settlement in consultation with suppliers.
- Plan balance sheet : Ensure a healthy asset and financing structure, i.e. finance long-term assets with long-term capital. In the event of withdrawals, equity of at least around 30 percent should be maintained as a guide.
- Monthly plan/actual comparison of all sales and cost items as well as the operating result and available liquidity. Ideally, the monthly BWA should be provided five days after the end of the month. Define the causes of deviations and take countermeasures if necessary.
Optimizing the financing structure
According to the interim manager, there was currently no reason to pay off the long-term loans with their favourable conditions. However, the overdraft facility should be repaid as quickly as possible and the dependence on just one bank should be eliminated. Several measures were available for this purpose:
- The use of factoring and the sale of receivables, including debtor management and default protection. This is a very good instrument for business growth in particular. Offers should be obtained from several institutions and compared. The most suitable offer in terms of price, services and additional liquidity for the business should then be agreed and implemented. As a result, the company gained considerable liquidity and was able to significantly reduce the use of the expensive overdraft facility.
- Use of innovative goods purchase financing: This revolving financing also freed up additional liquidity.
- Change of house bank with regard to payment activities and the overdraft facility (now greatly reduced). Here, explorations were already underway with a long-standing and now high-ranking contact at the targeted institution.
All these measures have spread the financing of the business across several shoulders, reduced one-sided dependencies and enabled a certain gain in flexibility with regard to future financing.
Recommendations for action regarding cooperation with external partners
- Change of house bank
- Change to new tax advisor with the requirement of timely and reliable reporting
- Involvement of commercial expertise, initially for the first half of 2020. The purpose was to support the implementation of the recommendations for action, familiarize key functions with the relevant topics and monitor the profitability of the individual products and services.
Results of the current mandate pointed in the right direction
The first results achieved pointed in the right direction. Among other things, the following goals were achieved:
- The bank agreed to the concept and the proposed options for optimizing the financing and extended the overdraft facility by a further three months. This eased the company's financial situation. After three months, the bank and company jointly reviewed the effect of the measures taken.
- The liquidity situation was planned on a weekly basis and mirrored against the actual development of the current account. Target/actual deviations were identified at an early stage so that appropriate measures could be initiated. This kept short-term liquidity under control and ensured the company's solvency at all times.
- The concept for the future opened up perspectives for the future development of the business and served as a guide for the half-yearly review.
- The medium-term financial planning provided a good orientation for the course over the coming months, particularly with regard to liquidity. The impact of major orders and investments on liquidity could be calculated at an early stage, the result could be estimated and appropriate financing measures could be discussed with potential lenders. In addition, the planning served as the basis for a target/actual comparison for sales, costs and earnings and became an essential part of reporting, especially to the company's bank. This made the company's finances transparent.
In addition, important changes were in progress.
- The management acquired planning and control software that enabled them to professionalize controlling promptly, efficiently and correctly.
- The financing structure was diversified and the high overdraft facility was largely replaced by innovative and more economical financing instruments. The planning and quotation phase was completed and implementation began shortly afterwards.
Preparations were also underway for the change of tax advisor and house bank. This ensured better and more timely collaboration with key external partners.
