Balance sheet restart: optimise profit and cash to inform your future funding strategy

As we identified recently, UK businesses are now entering a challenging phase in their path to recovery, attempting to balance efforts to boost revenue alongside bringing their debts fully under control, as government support measures begin to taper down.

Many companies raised enough liquidity to survive the full force of the pandemic during periods of enforced lockdown in 2020 and earlier this year, but this unprecedented level of borrowing has left balance sheets stretched and in need of normalising.

The pressure is rising to act now, with debt amortisation and interest holidays ending, while deferred refinancing dates are now quickly approaching. As businesses seek to capitalise on the pent-up consumer demand now released into the market, capex needs and other investment opportunities will also be back on the agenda, despite the continued uncertainty surrounding the medium-term economic outlook. The fallout from the pandemic continues to throw curveballs at companies with unrelenting frequency, and agility and flexibility remain key characteristics in being able to ride out the storm.

Given the extreme overleveraged position many organisations find themselves in, it is now essential to restore shareholder confidence and maintain stakeholder support for the recovery.

Critical to achieving this aim is restarting balance sheets with a robust strategy to deleverage through either cash generation or finance raising. The first step being to optimise a company’s profit and cash position, from which funding strategies can then be aligned and refreshed. With both elements in place, implementing an overall deleveraging strategy can begin.

Tackling profit and cash up front will allow any funding gap to be minimised, and should factor in four important steps to build reliable and scrupulous base and enhanced plans:

• Review and refresh the base plan: Given the economic uncertainty that still remains, any base plan should be flexible enough to maintain credibility under multiple scenarios. Normalised profitability should be established and adjusted for non-recurring items and any potential forced closure/disrupted periods.
• Release tied up liquidity and repay debt: Carefully review cash and working capital management, and also consider surplus asset and/or non-core business disposal alongside capex optimisation.
• Improve EBITDA and increase debt capacity: Assess and implement tactical revenue actions, such as price increases or dropping loss-making customers. Also identify and execute on cost reduction quick wins across business operations. In addition, it is important to look carefully at opportunities to normalize cash flows and profits to exclude any non-continuing items caused by the pandemic.
• Factor in the impact of potential investment opportunities: Consider how to exploit strategic or tactical M&A opportunities, investment in new locations, and any high-growth potential new product or service developments.

In our next post, we’ll look at how these renewed profit and cash roadmaps can be put to use in establishing future funding needs and debt capacity, before moving to the outline of a deleveraging timetable.