Many companies are being challenged by the paradigm shift sparked by the coronavirus pandemic. Business leaders have an opportunity to steer their companies in a direction of superior value creation by embracing drivers of value other than growth for the duration of the crisis.

1. Cash Management
and
Pivot to Profit
November 2020

2. Overview
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With the U.S. in the midst of a severe economic downturn, companies must reexamine
their strategy and make the necessary changes to thrive in a new paradigm.
• As a result of COVID-19, the growth outlook for many companies is now
decidedly negative.
• However, growth is not the only value creation lever that business leaders
can employ.
• Now is the time for business owners and leadership to reacquaint
themselves with equally proven, though somewhat less sexy, means to
driving value.

3. VALUE CREATION DRIVERS
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4. Value Creation Characteristics
Actionable Focus on measures that can be directly influenced.
Scope of Impact
Focus on measures that will deliver a considerable
impact to company performance when optimized.
Scalable Focus on measures that scale.
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While there are many value creation drivers, in looking to recast a strategy there are
certain characteristics that should be sought out.

5. Improvement
It is vital to understand where you are heading as a company, and what success looks
like.
For instance, any (or all) of the following might be an appropriate goal for a company
seeking to execute a strategic pivot away from a growth orientation:
1) Increase gross margin by 5 percentage points
2) Decrease net working capital by 10%
3) Calculate the cost of customer acquisition and reduce by 20%
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Develop a Thesis
Generating improvement, especially in the context of a strategic pivot, can be
challenging. Start with a thesis, move on to goals and then focus on execution.

6. Unit Economics
A strategy that seeks to maximize revenue growth
is a strategy that, at the margin, will tend to be
associated with gross margin erosion (absent
technology driven network effects other structural
idiosyncrasies).
The impact of flat or declining revenue can be
offset, in part or in whole, by improving unit
economics.
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KPI: Gross Margin
Gross Margin = Gross Profit / Revenue
Revenue
Cost of Goods Sold
=
Gross Profit
Insight

7. Increasing Gross Margin
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1) Analyze sales and calculate gross
margin by product / service and by
customer.
2) Generally large discrepancies will
jump out.
 Are there products / services with
unacceptably low margins?
 Are there customers who fit that
description?
3) Complete a proforma analyses to
model impact of changes.
 What is the impact of cutting low margin
products/services/customers?
 What is the impact of a price increase?
Current Fcst

8. Working Capital
When leadership optimizes a company’s working
capital needs, it is increasing the capital efficiency
of a business by reducing the total amount of
capital needed to fund operations.
Since any increase in Current Assets represents a
use of cash, and any increase in Current Liabilities
represents a source of cash, the goal is to reduce
Accounts Receivable, Inventory, and Other Current
Assets while increasing Accounts Payable and
Other Current Liabilities.
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KPI: Net Working Capital
Net Working Capital ~ Accounts Receivable + Inventory – Accounts Payable
Accounts Receivable
& Inventory
Accounts Payable
~
Net Working Capital
Insight

9. OptimizeWorking Capital
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1) Increase pace of
collections activity
2) Offer incentives for early
or pre-pay
3) Work to increase your
strategic importance to
customers
Decrease
Accounts Receivable
Decrease Inventory
1) Reduce number of
products
2) Align ordering with
forecast demand
3) Lock in lead times with
key suppliers
Increase Accounts
Payable
1) Negotiate credit limit
increases with suppliers
2) Slow supplier payments
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3) Increase communication
to ensure adequate
supplies

10. Analytic Insights
Successful companies understand that data-driven
insights are the one universal value creation
opportunity.
By investing constantly in data reporting and
analysis, high-performing companies develop
crucial insight into themselves and their markets
and then seek to constantly push out the frontier
of that insight.
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KPI: TBD
Insight

11. Optimize Analytics
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1) Identify promising areas of inquiry.
 Large resource commitment, ability to
optimize.
2) Identify the data source(s) available.
3) Will benchmarking be internal or are
there good external benchmarks?
4) Analyze the data.
 What is the potential benefit of
improvement to prior (internal values) or
external benchmark values?

12. UNDERSTANDING CASH FLOW
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13. Income Statement
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The Income Statement measures profitability (revenue – expenses) but does not take
into account timing. A company can be profitable while losing $.
For illustrative purposes only, all values shown here are
hypothetical
This hypothetical income statement
forecast suggests indicates that a
company will have only a modest Q4 loss.
Period Ending 10/31/20 11/30/20 12/31/20 Q4
Revenue 65,000$ 95,000$ 135,000$ 295,000$
Cost of Goods Sold 45,500 66,500 94,500 206,500
Gross Profit 19,500 28,500 40,500 88,500
Selling Expense 7,150 10,450 14,850 32,450
Payroll Expense 11,875 9,500 9,500 30,875
Rent Expense 6,000 6,000 6,000 18,000
Utilities Expense 1,250 1,250 1,250 3,750
Other Expense 1,250 1,000 1,000 3,250
Operating Income (8,025) 300 7,900 175
Interest Expense 5,000 5,000 5,000 15,000
Tax Expense - 75 1,975 2,050
Net Income (13,025) (4,775) 925 (16,875)
Profit Margin
Gross Margin 30.0% 30.0% 30.0% 30.0%
Operating Margin -12.3% 0.3% 5.9% 0.1%
Net Margin -20.0% -5.0% 0.7% -5.7%

14. Cash Flow Forecast
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A weekly cash flow forecast for the same period indicates considerable cash burn
($72K, vs. the $17K implied by the income statement).
For illustrative purposes only, all values shown here are hypothetical
Week Ending 10/3/20 10/10/20 10/17/20 10/24/20 10/31/20 11/7/20 11/14/20 11/21/20 11/28/20 12/5/20 12/12/20 12/19/20 12/26/20 Total
Week # 1 2 3 4 5 6 7 8 9 10 11 12 13
Receipts
Cash Collections 12,500 12,500 12,500 12,500 12,500 13,000 13,000 13,000 13,000 13,000 23,750 23,750 23,750 198,750
Other Cash Receipts - - - - - - - - - - - - - -
Total Receipts 12,500 12,500 12,500 12,500 12,500 13,000 13,000 13,000 13,000 13,000 23,750 23,750 23,750 198,750
Operating Disbursements
Payroll 2,375 2,375 2,375 2,375 2,375 2,375 2,375 2,375 2,375 2,375 2,375 2,375 2,375 30,875
Material Purchases 8,750 8,750 9,100 9,100 9,100 9,100 9,100 16,625 16,625 16,625 16,625 23,625 23,625 176,750
Rent 6,000 6,000 6,000 18,000
Utilities 1,250 1,250 1,250 3,750
Sales Commissions 6,000 7,150 10,450 23,600
Other Operating Disbursements 250 250 250 250 250 250 250 250 250 250 250 250 250 3,250
Total Operating Disbursements 17,375 12,625 17,725 11,725 11,725 17,725 20,125 19,250 19,250 25,250 20,500 36,700 26,250 256,225
Non-Operating Disbursements
Interest 15,000 15,000
Taxes -
Other Non-Operating Disbursements - - 15,000 - - - - - - - - - - 15,000
Cash Flow
Operating Cash Flow (4,875) (125) (5,225) 775 775 (4,725) (7,125) (6,250) (6,250) (12,250) 3,250 (12,950) (2,500) (57,475)
Non-Operating Cash Flow - - (15,000) - - - - - - - - - - (15,000)
Net Cash Flow (4,875) (125) (20,225) 775 775 (4,725) (7,125) (6,250) (6,250) (12,250) 3,250 (12,950) (2,500) (72,475)
Cash Roll-forward
Beginning Balance 100,000 95,125 95,000 74,775 75,550 76,325 71,600 64,475 58,225 51,975 39,725 42,975 30,025
Operating Cash Flow (4,875) (125) (5,225) 775 775 (4,725) (7,125) (6,250) (6,250) (12,250) 3,250 (12,950) (2,500)
Non-Operating Cash Flow - - (15,000) - - - - - - - - - -
Ending Cash 95,125 95,000 74,775 75,550 76,325 71,600 64,475 58,225 51,975 39,725 42,975 30,025 27,525

15. Cash Flow Overview
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• Profitability matters, but in the short-term, cash flow matters
more for a business. Optimizing unit economics will make
your company more profitable in the long-run, but you have
to make it to the long run first.
• Companies can master their cash flow by focusing on a weekly
cash flow forecast and working to optimize their working
capital (speed up collections, negotiate concessions from
suppliers, hold minimal inventory).
• Growth does not save companies in a recession, cash flow
does.

16. CONCLUSION
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17. David Johnson
Email: david@abraxasgp.com
Ph: 312-505-7238
Twitter: @TurnaroundDavid
David Johnson, founder and managing partner of Abraxas
Group, has a 20-year track record of driving organizational
change. David has served as interim executive or financial
advisor to dozens of middle market companies in transition.
Throughout his career, David has demonstrated a
commitment to thought leadership, with numerous speaking
engagements and articles on the topics of business
transformation, change management, performance
improvement, restructuring, turnaround and value creation
to his credit.
David received his MBA from the University of Chicago and
completed his undergraduate studies at Fairleigh Dickinson
University.
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