Pain: Corporate risks
The case company is a privately-owned SME, distributor of highly regulated chemicals. Past company financials initially indicated a very good position, a stable business and above-market profitability.
Advisor approached the company with the goal to optimize tax-related expenses and propose the client how to manage the excess cash more efficiently. Surprisingly, the consultant realized that the company is in fact in a very delicate situation and should be focusing on a completely different area – i.e. risk management. The discussion with the owner revealed extremely high concentration of buyers and significant dependency-related risks.
The main buyer of a case company represents approx. half of company sales. His performance is poor, but relatively stable. Nevertheless, the company analysts did not do their job properly – the analysis of the buyer that Consilue did in another case revealed a very serious financial problems on the consolidated group level, which could quickly result in fatal consequences for the case company.
Addressing the pain: Corporate risk management measures
Immediately after Consilue realized the seriousness of the situation, the client was pushed to urge. The consultant arranged with the client a dedicated meeting to discuss current situation with the client and present potential consequences of poor risk management. In the next phase, the proposed steps were systematically presented, with one single goal – to minimize the underlying corporate risks and strategically overcome the client dependency issue.
The approach the consultant proposed to the company:
- Firstly, the company and the consultant need to minimize outstanding problematic receivables through renegotiation of the days receivables outstanding (DRO). Furthermore, also a cost-effective solution for the securitization of receivables should be found. Additional insurance costs should than be charged to the buyer.
- Based on the financial projections prepared, the consultant has to determine the optimal financing structure. In other words, the target amount of equity needs to be kept as minimal as possible, however still at the reasonably acceptable levels for the creditors. Afterwards, the financing has to be agreed with banks and suppliers and the predetermined amount of equity paid out to the shareholders.
- With the above stated measures the company is only buying time. The company needs to impact the source of the problem – lack of sales diversification. Since the organic way of market penetration would last too long in this case and is due to that fact in given situation not appropriate, one of the possible solutions pointed out to the client is to lean in the direction of M&As, i.e. gain the network through acquisition of a target with relatively diversified sales. These activities, however, should take place independently from the base company in order not to poison the equity of the overtaken company with the company’s underlying risks as well.
Despite warnings to speed up the decision-making process, the company was hesitating with the active engagement and implementation of preventive measures. The company managers and owners did not see the real added value in the proposed changes at the moment of writing of this case study.
Results: No risk management solution for now – bad sign
The importance of risks is often underestimated, also due to the fact that the financial impact lags. The case company prolongs to be heavily exposed to risks, since the management decided to make changes gradually.
Due to the fast pace of changes on the buyer side, the company crisis management and other last-minute measures might result in additional unnecessary costs.
Client’s testimonial: Risk assessment procedure in action
We are now aware of the financial problems in which the buyer ended up and we are tracking the developments more carefully. We are getting assurances from their side that the situation will not be impacting the strong partnership we have established through the years of good cooperation. The agreed 20 days increase in due date in trade receivables is probably of one-time nature. We checked with our insurance company and it seems they are not ready to securitize the outstanding receivables. For the moment we continue to work further as we did so far and we will see what time brings.
Advisor’s thought: Risk management consulting
Nowadays the management needs to understand the priorities and companies need to develop the capability to act fast when this is required. The corporate culture should be developed hand in hand with the change management philosophy. The ability of fast responding and value-based management is one of the ultimate things to long-term survival. The attitude examples towards changes should come from the very top.
The consultant is confident that the proposed approach adds value to the client, however the client itself needs to realize this as well. It is of extreme importance that the consultant remains at client’s side and further strengthens the level of trust.