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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


Agenda– Key areas of focus

- Cash management

- Understanding stakeholders’ needs

- Communications

– Conclusion and recommendations

Cash management

Key areas of focus


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


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


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


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


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


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)


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


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


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


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


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


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


Commonissues

Key issuesEarly assessment is critical as lenders will want to ensure pro-active

measures are implemented

Source: KPMG

Communication

Key areas of focus


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


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


Controlling the message

Source: KPMG

Conclusion andrecommendations


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


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


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


Neil Honess

Partner

Restructuring & Turnaround

T: 403 691-8014

E: [email protected]

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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Date post:	09-Jul-2020
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