Assessment of the financial position and outlook of a company in distress

Issue

Our client’s supplier ran into serious cash flow problems due to the bankruptcy of one of its subcontractors. According to the supplier, a price increase was needed in order for him to be able to finalise the current construction project for our client (capital expenditure materials).

Our client sought our advice as to whether he should accept such a price increase in order not to jeopardise the ongoing project and to avoid bankruptcy of the supplier.

Approach

	Analysis of company’s past performance and financial situation
	Preparation of cash flow planning for all current projects and existing order book, based on supplier’s input
	Calculation of impact of certain sensitivities on net cash flow

Recommendation

PwC’s review revealed that the supplier was virtually bankrupt and that additional funding was immediately required because:

• the supplier no longer had sufficient financing   capacity for finalising all ongoing projects in the short term.

Moreover it was obvious that the company would not be able to repay all existing financial debts, leading to serious doubts about its going concern position.

Results

In addition to the required extra funding, PwC proposed some scenarios, indicating the benefits and pitfalls for each of them. 

On the basis of the various alternatives, the supplier agreed not to increase the price but he shortened his payment terms instead, after re-negotiating existing debts with his banks.