Partner: GCS
Since the start of the Fourth Industrial Revolution (which was presented by Klaus Schwabb at the World Economic Forum Meeting in Davos in 2015), retail companies have been trying to figure out what benefits that big data can provide their business. What role does it play in business rescue?
The answer is actually very simple. Big Data is a valuable tool when it comes to knowing your customer (KYC). It provides details on when a person is purchasing a product, where they are purchasing it (online or in stores and which stores) and how they are personalizing products if there is an option to do so.
Based on this information, business can then make key decisions regarding product development.
KYC is not limited to the retail space. Turnaround professionals can use big data to drive their business. Conducting an independent business review provides turnaround professionals with the necessary data to find out more about the challenges that their clients face and the interventions that they can put in place to address these challenges.
Addressing the most important challenge
Through my interaction with clients, I have seen that many companies have labelled the Covid-19 Pandemic as a root cause of their financial distress. However, upon closer inspection, GCS has seen many cases where companies would have found themselves in financial distress even if the Pandemic didn’t occur.
Financial distress is a situation which places companies into crisis management mode. The preservation of jobs and providing value to shareholders (creditors and investors) are top priorities for any turnaround professional. This can only be done through addressing the company’s cash flow and the implementation of a cash flow management system.
Some of the immediate issues that need to be addressed include:
- Ensure you have a robust framework for managing supply chain risk;
- Ensure your own financing remains viable;
- Focus on the cash-to-cash conversion cycle;
- Think like a CFO, across the organisation;
- Revisit your variable costs;
- Revisit capital investment plans;
- Focus on inventory management;
- Extend payables, intelligently;
- Manage and expedite receivables;
- Consider alternative supply chain financing options;
- Audit payables and receivables transactions; and
- Understand your business interruption insurance.
The last item is important, and it is crucial for companies to read their insurance policies properly. The Covid-19 Pandemic forced many accommodations business around the country (boutique hotels and bed & breakfast establishments) to close their doors during the company’s hard lockdown in 2020.
In an effort to preserve their businesses and pay staff, many of these companies lodged business interruption claims with their insurers. Their insurers refused to pay stating that the policy document clearly points out that the policy will only pay out if the policyholder had to close their business as a result of one of their staff members contracting Covid. The insurers pointed out that companies were not covered for the eventuality of Government forcing them to close their doors.
After many legal battles, the insurers were ordered to honour these claims. But it does raise the issue of knowing your policy and understanding that companies do stand a chance of facing financial distress if they are reliant on this cash which then ultimately does not get paid out.
Photo By: Canva
The supply chain crisis is a bugbear
The global supply chain crisis is an event that has proven to be a root cause of financial distress for many companies.
While I pointed out at the beginning of the article that many companies would have found themselves in financial distress even if the Covid Pandemic did not occur, we are seeing instances where well run companies are finding themselves in financial distress because of external disruption such as the supply chain crisis.
How a company responds to the supply chain crisis will be a good indicator of whether the company has a reasonable prospect of being rescued. This is something that creditors and financers look for when committing funds towards a business rescue or business turnaround.
Proactively manage the supply chain crisis…assist business rescue
A report by McKinsey (Supply chains: To build resilience, manage proactively which was published on 23 May 2022) points out that companies can proactively manage the immediate challenges posed by the crisis by carrying our three basic actions.
The report points out that companies should create a nerve center to consolidate organizational responses. A cross-functional team for such a nerve center coordinates and manages proactive responses to issues that might range from caring for distressed colleagues to testing financial stability under a range of scenarios. The nerve center could be organized under four categories: people, operating cadence, decision-enabling tools, and an early-warning system, which could, for example, signal potential political developments or cyberthreats, as well as compliance or regulatory issues (see sidebar “Designing an integrated nerve center”). This helps business rescue efforts.
Photo By: Canva
The report adds that companies should simulate and plan for extreme supply-and-demand disruptions. This second category of actions involves ordering components earlier than usual and allowing extra time for delivery; accounting for the higher cost of energy, materials, and transportation; and checking inventories of critical materials to reprioritize production should shortages seem inevitable. If logistics disruptions are likely, try to get capacity on alternative routes. Another tactic to avoid building up excess inventory is simulating the effects of regional demand shifts on production. Examine the risks in supplier networks, labour, manufacturing, and delivery to determine if any part of the value chain is exposed to internal or external disruptions. Set up controls to minimize their effects.
Finally, the report points out that companies should re-evaluate just-in-time inventory strategies. If a crisis on the scale of the pandemic occurs, the absence of a back stock of inventory or materials can seriously threaten supply chains. Many of today’s most pressing supply shortages (semiconductors, for example) occur in supplier subtiers where manufacturers have little visibility. To achieve transparency beyond the first tier, companies could work to identify suppliers from spending data, N-tier mapping, or both. Prioritize them by their importance to the business and assess their vulnerability. Some potential measures to mitigate risk include finding new suppliers, redesigning networks, resetting inventory targets, keeping safety stocks, and sourcing locally or regionally.
The value of information in business rescue
As you can see, there is a lot of value that can be found in having truthful, accurate information when planning a business rescue or business turnaround.
It is therefore important that any company that finds itself in financial distress should conduct an independent business review to find out where their companies are facing challenges. Having a 360° view of the company allows turnaround professionals to know their customers and map an appropriate business rescue plan that will help them navigate their financial distress. They can therefore act accordingly.
Moses Singo is a Partner at Genesis Corporate Solutions and is a Junior Business Rescue Practitioner
