Background & Challenges
An established provider of linen hire and laundry services to some of London’s top restaurants, hotels and spas had been acquired by a turnaround partnership and appeared to be on target for a successful exit. Operating from a 40,000 square foot facility in Park Royal, the business generated a robust revenue stream and reported good levels of profitability.
However, a series of plant failures over summer exposed some serious weaknesses in the business when customer billing and collections were affected. Despite apparent profitability, the impact on cash flow indicated that the Operating Model was flawed.
The loss of a number of key accounts and rapidly diminishing cash reserves meant that an urgent review was required to identify the problem and provide solutions. The company operated with a lean finance function and had outsourced financial reporting and advisory services. The investors now recognised that this approach was not providing them with the insight and visibility that they needed to properly understand the business, and that an insource solution was required to help connect the dots.
A fresh perspective from a seasoned professional can sometimes make a real difference. When we strip away the noise we can often reveal simple solutions to what had appeared to be complex problems.
An initial review of the management accounts revealed that there was disconnect between the business model and what was being reported. Expenditure against linen purchased for rental had been deferred as stock, but the depreciation of this asset was significantly understated and did not reflect the actual life of the linen. The balance sheet had also been used to “warehouse” non-operating payments, e.g. management charges. By preparing a historic cash flow statement based on the profit & loss account and balance sheet, I was able to clearly identify the leakage of funds not reported through the company’s profit statement to create visibility over this issue.
A further matter compounding the situation was the release of negative goodwill (arising on acquisition of assets at below market value). This had the effect of bolstering weak operating profits, creating a false sense of security. The management team had been so focussed on improvements to operational performance (in peak periods they can process up to 900,000 items per week), that with reported profitability, they had lost sight of the impact of increased sales churn, and escalating labour costs consequent on changes to minimum wage.
The solution was to create a model for the business that would provide a comprehensive view of sales, life time value of linen stock, fixed and variable production costs, overheads, profitability, cash flow and “headroom” within the invoice discount facility. The resulting projection gave a complete view of the business and a clear view of the funding requirement.
The incumbent Financial Controller was mentored to take wider ownership of the accounting process, and reporting was brought in-house. These changes resulted in lower costs, more timely and relevant financial information and significantly increased financial awareness. Armed with a better understanding of the linen life cycle, expenditure on stock can now be projected and managed in the same way as any other business asset.
A weekly dashboard was created to display the KPIs within the business. This presented a view of the health of the business on a single page and is now used as the basis for weekly operating meetings.
The plan generated a clear view of the funding and profitability for the business and created an opportunity for a new PE investor to take the business to the next level. Confidence in financial performance has enabled investment in new automated processes to significantly improve capacity and profitability, paving the way for a successful exit in the future.
“Steve has worked with AAA Linen for over a year. He was initially asked to review the cash flow requirements for this turnaround business and to make recommendations to improve the management information. He didn’t just tell us the problems, he came in and implemented solutions. Not only do we now have more reliable budgets and forecasts, but also more dependable accounting information. He has remained calm and diligent through some difficult times, has acted as a good sounding board, mentor to staff, and has managed difficult customer issues to achieve positive outcomes.”
Stephen Lloyd, CEO, AAA Linen
EFM Expert: Steve Smith