Financial Services Case Study

Compliance with Financial Covenants Leads to Fiscal Clarity, Penalty Avoidance & a Strong Banking Relationship

By Michael Wilk, Managing Partner

Situation – A young, rapidly growing food distribution company was experiencing a 100% revenue increase in its fourth year of operation. In less than one year, their borrowing facility quadrupled, making them subject to financial covenants for the first time. Although company revenues were extremely brisk, they were experiencing less than anticipated cash flow. This caused unexpected borrowing needs and threatened their ability to comply with borrowing base calculations, possibly resulting in potential penalties and jeopardizing their banking relationship.

Solution – Penn Valley Group developed a customized cash flow forecasting and budgeting model which included pro forma borrowing base calculations. By providing clarity and insight into cash inflows and outflows, we helped this client identify the need to better manage working capital. PVG also created a plan with specific goals such as inventory reduction, accounts payable growth and accounts receivable reduction. In addition to defining strategic financial objectives, the plan outlined explicit tactics for accomplishing these fiscal goals, and we worked with them on the execution of these action items.

Results – Almost immediately -- within six to eight weeks -- this client achieved a reduction of working capital. By remaining in compliance with bank financial covenants, it enabled them to maintain a strong bank relationship and avoid potential penalties for non-compliance. Accelerated cash flow reduced their level of debt, resulting in less interest expense for this client. In addition to improving their credit profile, the company was able to finance their hyper growth with their existing debt. Finally, the insight gained into cash flow drivers (such as variable and fixed expenditures) enabled them to better understand the financial consequences of certain operational decisions, and to strengthen their ability to make sound decisions going forward.

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