Insights | Blog
2014’s Extreme Weather Exposes Underperforming Businesses
Over the last two months, the US economy was literally frozen while the country was shutdown by inclement weather, contributing to declining corporate earnings and the consumption of liquidity as companies struggled to keep the heat on. As temperatures rise this Spring, so too will corporate revenues and earnings. In fact, many companies will recapture lost revenues because pent up demand for goods and services has not subsided. However, the excuse that extreme cold drove poor financial performance will only explain half of the problem for underperforming companies, which are now exposed due to tight liquidity and covenant breaches.
Many business leaders are experiencing feelings of deja vu (think back to 2008) as they find themselves at odds with their lenders after breaching loan covenants over the past 2 months because their performance deteriorated to the point where they are unable to service their debt. Furthermore, many businesses have seen their liquidity evaporate as lines of credit increased due to skyrocketing inventory levels and continued “strategic” spending that wasn’t curtailed to preserve short-term liquidity. Lenders are working feverously to understand the impact the cold has had on many companies’ financial performance by asking them to reforecast their performance and availability through year-end. Companies with minimal perceived risk and a credible leadership team are receiving waivers and quickly returning to business as usual. Unfortunately, lender responses aren’t as rosy for many underperforming companies, as they are forecasting tight liquidity throughout 2014, and are struggling to produce credible forecasts demonstrating that they will produce enough free cash flow to meet their debt obligations.
If you’re the leader of an underperforming business, now is the time to face the facts and seek corrective action as we all know old man winter is not a once in a lifetime event. The sky might not be falling now; but another unplanned event later in the year may put your organization into an unrecoverable tailspin. You need to focus on developing and implementing a strategy to accurately forecast your cash needs, improve margins, manage “strategic” spending, improve working capital, and put a plan in place to de-lever the business.
Additionally, you should be thinking about developing a plan ‘B’ to preserve net free cash flow in preparation for the next economic downturn (this may only be 3-4 years away). This type of undertaking takes a lot of hard work, and often requires the help of external professionals to provide the extra horsepower and third-party expertise needed to develop the strategy so your team can still remain focused on running the business. Yes, this may cost you a little extra money in the short term, yet in the long run will assist you in achieving far greater results in a shorter amount of time. Furthermore, your current lender will applaud your efforts to not only protect the company, but their interests as and most likely will work through the covenant violations with you, affording you the time to fix your business. Don’t wait for the next storm to hit if you are exposed today.