The company was seeking to maximise cash collection from its loan portfolio, whilst also making significant cost savings.
The aims were to maximise net cash flow whilst keeping the investors fully supportive of the business and maintain adequate working capital in the business.
The challenge was to rebuild the confidence of the investors in the business through providing transparent and reliable business plans, forecast and management reporting, and to then execute the business plan to achieve a performance in line or better than plan.
A specific area of uncertainty was that cash into the business was difficult to accurately predict and needed detailed modelling, whilst the cost base was in turn highly dependent on the cash being generated, and the ability to carefully manage down an element of fixed cost. The cost base largely consisted of staff, property and IT costs.
A key part of the challenge was to determine the appropriate time for selling parts of the loan portfolio, and to determine an acceptable sales price. Another key question was determining the most effective way to maximise cash collections on parts of the portfolio that were not sold.
The main KPIs were net cash generated, and cash returned to the investors, together with cash to cost ratios.
We developed detailed cash flow forecasts and longer-term business plans. This provided both a view of expected cash generated over the next 1-3 years, together with a short-term view of the next month and 3 to 6 months including daily cash usage. These models could be flexed to reflect different possible business approaches and outcomes.
Central to the overall financial management was the ability to provide surplus cash back to the investors and to provide reliable forecast information relating to this. This helped restore confidence from the investors.
We created detailed granular models to get an informed view of expected cash collections. For the cost base, we collaborated across the business to establish the required level of cost to support the anticipated level of business collection activity.
We produced analysis which compared the expected value of selling part of the portfolio against continuing to hold and collect. This involved comparing a possible sales value at a point in time obtained from available market data and intelligence, with the cash flows associated with continuing to hold the asset. When economically beneficial to do so, elements of the loan book were sold.
Analysis was also undertaken considering the effectiveness of different collection approaches. e.g. outsourcing, collecting locally or collecting centrally, and use of incentives to debtors to pay in return for favourable settlement terms. Consideration also had to be given to the best way of incentivising collections staff and management. By performing limited trials we were able to determine the most effective collection methods and then apply these approaches across the wider loan book, thereby improving overall business performance.
We were able to reduce costs by challenging all cost lines, removing some costs where there was limited economic benefit, and where possible work with suppliers to reduce costs. The cost base reduction also included closing business units as they became uneconomic or where lease terms expired. Whilst cash flow projections were the main output from the business plans, they also included Profit and Loss and Balance Sheet analysis.
We were successful in maintaining positive relationships with the investors through providing reliable business plans, analysis and Management Information. The stakeholders benefited by having a clear expectation of what return they could expect and when. Thorough and detailed variance analysis was produced.
The business forecasts were done on a rolling basis, so that where new information became available this could be fed into the forecast model on a timely basis, and an updated forecast could be provided. In this way we ensured that investors were fully kept up to date, and we were able to constantly manage their expectations.
The final result was that we were able to deliver a business performance that was significantly better (+50%) than the initial plans, ensuring that stakeholders remained engaged throughout the process.
EFM Expert: Simon Finbery