Case Study: Cash-flow

Sector: Technology/distribution

cashflow case study efm steve smith

Concern:
A recent start-up lacked financial management at a critical period just prior to a major product launch. The business model had been allowed to drift, and there were concerns that available funding would no longer be adequate to support the manufacturing and inventory requirements. The management and investors urgently needed to understand how changes to working capital would affect cash-flow.

Background:
The incumbent CFO had resigned shortly following the start-up, due to differences of opinion with the PE partners. The finance function had experienced a high level of churn as a result of poor staff selection and lack of leadership, but worst of all the Business Plan had been allowed to drift from a technology “proof of concept” to a more fully developed brand development and distribution model, but without any consideration given to funding! Tensions were rising between management and investors as the reality of the situation became more clear. A substantial pre-launch marketing budget had not been controlled and funds were urgently needed to ensure that finance was in place to support the critical approval of a multi-million dollar manufacturing contract with a factory in China.

Challenge:
To rapidly ascertain the funds used to date and to assess the cash-flow requirement for the business going forward. Accounts and cash-flows had not been maintained, and the Business Plan needed to be updated to reflect the changed model. The investors were familiar with the technology sector but had not understood that the working capital required to support a manufacturing and distribution business was very different.

Solutions:
In order to ascertain the use of funds to date and the Business Plan that would underpin the cash-flow forecast, the accounting records were brought up to date and the plan revised to reflect the current intentions.

The management team had not recognised the implications of the inventory purchases now proposed. Despite the apparent profitability indicated by the plan, the high volume of inventory required (to achieve a viable unit cost), relatively low margins, and extended credit offered to channel distributors meant that there was a very substantial working capital requirement.

The funding situation was made worse when it also became apparent that a high level of available funds had already been used to pay for traditional brand development rather than supporting a digital marketing campaign and POS material due to misalignment in the team. Significant areas of cost had also been overlooked, in particular the resources required to manage the distribution partners, and the allocation of market development funds (general practise with distributors).

Through close collaboration with the CEO and COO, the plan was revised, and a detailed cash-flow projection prepared. Approval processes were implemented, and budgetary controls put in place. Consideration was given to the challenges posed by the long inventory cycle, and alternative debt finance arranged.

Benefit:
Following a successful launch in autumn 2015, the unique technology offered by this business was successfully demonstrated to consumers and extensively reviewed in the press and on social media by influencers and analysts to generate wide interest. In early 2016, interest was received from potential acquirors, and by summer an offer was made by a leading US wearable technology company. Despite considerable volatility in this niche sector, the investors (private equity and VC) achieved a satisfactory outcome and a sale was agreed in December 2016.

Case Study: Steve Smith (Click here to see his profile)