The value creation advantage: boosting cash flow in family offices

Family offices can unlock cash flow through targeted value creation by identifying and leveraging core business drivers.

In brief:

• Value creation involves a continuous cycle: Diagnose issues, develop and implement solutions, and analyze results, leading to ongoing improvement.
• Identifying and leveraging the business’s unique core driver allows a family office to apply tailored frameworks, addressing specific needs and driving growth.

Family offices and their principals are constantly seeking innovative ways to unlock cash without disrupting their meticulously crafted investment strategies. Despite their association with significant wealth, accessing free cash flow often remains a challenge. However, unlocking it is achievable through targeted value creation within the business/es that family offices directly invest in.

Value creation, while seemingly abstract, involves identifying and leveraging the unique “core driver” that propels each business, regardless of the industry, product or service. By pinpointing this critical component, family offices can apply a tailored value creation framework to address their specific needs. This approach demystifies value creation, transforming it from a nebulous idea into a concrete strategy for financial growth.

Once an issue or risk is identified by the monitoring framework, one or multiple initiatives are developed to address it. These initiatives are implemented through detailed plans that outline accountability, expected outcomes and stakeholder management. It is key to obtaining buy-in and keeping open communication with those impacted by the initiatives (internally and externally). This structured approach safeguards that every aspect of the solution is carefully managed and aligned with the overall business strategy.

The evaluation phase

After implementation, the outcomes of the solution must be measured and reflected upon. This evaluation phase is crucial for fostering a culture of continuous improvement, where the cycle of identifying issues, developing solutions and measuring results is constantly repeated. Value creation, therefore, becomes more than just a set of actions — it evolves into a mindset and culture that requires dedicated resources and unwavering commitment.

For family offices, adopting this value creation mindset can lead to significant financial gains and enhanced operational efficiency. By embedding this cycle into their strategic framework, family offices can continuously adjust and prosper in an ever-changing business landscape. This is illustrated in the following two case studies that feature (1) an automotive supplier, and (2) an aircraft maintenance, repair and operations (MRO) and fixed-base operator (FBO) facility.

Case study: automotive supplier

An automotive supplier specializing in structural products that has over 30 manufacturing locations across North America, Europe, and Asia sought to improve profitability. Key issues impacting its bottom line included rising raw material and variable costs, wage inflation, unanticipated demand changes due to supplier plant shutdowns, a lack of new business and a drop in gross margin.

To address these challenges, it conducted an extensive profitability review by plant, customer and program. It approached all customers with a price increase request and a timeline, negotiating agreements to meet objectives identified during the review. This process resulted in a recurring annualized profitability increase of over US$110 million, achieved through purchase order increases, immediate liquidity relief via back-dated retrospective increases and negotiated contractual material recovery through resale/indexing.

Case study: aircraft MRO and FBO

A privately held aircraft management company faced critical issues, including an inability to measure profitability by customer, high working capital requirements and a lack of financial tools to diagnose cash burn drivers. To address these challenges, the company conducted a revenue analysis, including a historical direct cash flow analysis, to identify cash consumption patterns and funding sources. Additionally, it is performing an activity-based costing exercise to assign indirect costs to customer contracts, improving the understanding of costs to serve and determining contribution margins by customer.

The historical cash flow analysis provided valuable insights into the drivers of cash burn and the deterioration of liquidity and working capital over time. In addition, the development of a pricing and profitability tool will assist in negotiating customer contracts, maintaining sufficient margins and avoiding unprofitable multiyear contracts.

Conclusion

Value creation offers family offices a powerful strategy to unlock cash flow and enhance operational efficiency without disrupting their investment strategies. By identifying and leveraging the unique core drivers of their businesses, family offices can apply tailored frameworks that transform abstract concepts into concrete financial growth strategies.

The continuous cycle of diagnosing problems, developing solutions and analyzing results fosters a culture of continuous improvement. This mindset not only addresses immediate issues but also prepares family offices to adapt and thrive in an ever-changing business landscape.

The case studies illustrate the tangible benefits of value creation. These examples demonstrate how targeted initiatives can lead to significant financial gains and improved operational efficiency.

For family offices looking to revolutionize their wealth management practices, adopting a value creation mindset is essential. Embrace this approach to drive sustainable growth and secure a prosperous future.