From the numbers to the change
- Your numbers sayInterest takes more than half of operating profit; cover has fallen below two
- The cause underneathBorrowing grew to fund working capital and losses, not assets that earn
- What changesRelease working capital, reprice or restructure the debt, stop borrowing to fund losses
- What to expectInterest cover back above comfort and falling debt
An illustration of how the thinking runs, not a client result.
The numbers to open first
Collect each loan: amount, rate, tenor, instalment, security, and what it funded.
| Number | How to get it | What worries us |
|---|---|---|
| Interest cover | Operating profit / interest | Below 2, and falling |
| Debt service coverage | Cash available for debt service / interest + principal | Below the sanction covenant |
| Interest as % of sales | Interest / sales | Rising even though sales are flat |
| Debt growth vs sales growth | Change in borrowings vs sales | Debt growing faster than sales |
Likely causes, and how the numbers test each
| Possible cause | What you would see in the numbers |
|---|---|
| Debt funding trapped working capital | Borrowings and debtors plus stock rise together |
| Debt funding losses | Borrowings rise in the months the P&L is negative |
| Costly short-term debt used long-term | Cash credit and short loans financing assets |
| Over-borrowing for capex | Fixed assets up, returns not yet arrived |
What to change, in order of effect
Map every loan to what it funded.
Match to the cause.
Release working capital
to pay down the costliest debt first.
Re-term mismatched debt:
short-term borrowing funding long-term assets should be lengthened.
Stop borrowing to fund losses.
Fix the margin and cost instead.
Talk to lenders
with a plan, once your numbers support the request.
Business under pressure? Let a CFO read your numbers.
A senior CFO reads them with you and tells you what is really going on. No cost, no obligation.
What to expect, and when
Releasing working capital can reduce interest in the first quarter. Re-terming debt takes lender discussion and may take a quarter or two. Test the plan against our cash runway calculator.
Mistakes that make it worse
- Borrowing more to pay interest.
- Using costly short-term debt for long-term needs.
- Ignoring the covenants in your sanction.
- Treating the interest line as fixed.
CFOAvatar complements every turnaround
A human CFO sees your business at the review. Problems do not wait for the meeting. CFOAvatar is connected to your accounting data and checks your numbers every day, so the scoreboard in a turnaround is always current. Ask it what an owner in trouble would ask:
What owners say after the numbers started talking
They even worked with us to finetune our software (Gross Mart) so we could get micro-level details on various aspects of the business. On top of that, they streamlined our receivables follow-up process and provided valuable guidance on bank loans and valuations.
Before CFOSurge came into the picture, our business lacked financial discipline. Once their team started overseeing our finances, everything fell into place. There was accountability and when you know someone is keeping track, you ensure things get done properly. It’s been three years and the systems they put in place are still working well. Our business is in a much better position today.
They have facilitated us in putting both process and financial systems in place as well as take some very difficult but required decisions. We are indeed pleased to record our appreciation of their individualized, friendly and timely support in our activities during the course of their association.
Quoted word for word from our clients. Read more client words →
Questions owners ask us
What is a good interest cover ratio?
Banks differ, and it varies by industry. Many look for at least 2. Below 1.5 leaves little room for a bad month.
Can I reduce interest without restructuring?
Often yes: release working capital to reduce borrowings, move costly debt to cheaper sources, and negotiate rates once the numbers improve.
When should I restructure debt?
When even a repaired business could not carry the repayments. Restructuring should be tied to a recovery plan.