Archived Published Articles

How Is Your Company’s Health?

by CRP Director Connie Higgins,
Thomas M. Kim, r² Advisors, LLC,
CRP Partner Holly O’Hara
as published in the Denver Business Journal

Remember your last doctor’s visit? Most people find going to the doctor or dentist an unpleasant experience. Unfortunately, some business owners manage their company’s health in much the same manner. Many executives in poor or declining businesses, wait until the last minute to ask for help or are in denial that their business is in trouble. By this point, options become limited and for a company in distress the cure can be painful.

These executives may not be aware that there are turnaround professionals available that offer an array of approaches and solutions for bringing a company back to healthy performance. Contrary to popular belief, a bankruptcy filing is not their only option. It is prudent that every avenue be explored before deciding on a drastic course of action.

Symptoms of a Faltering Business

First let’s examine the symptoms of a business in distress. Probably the most obvious of these is poor cash flow. Sales are off, customers are not walking in the door as they once did or expenses are out of control. It is becoming increasingly difficult for this business to meet payroll or other financial obligations.

In addition, creditors who were once upon a time friendly and generous are now reserved and may be pressuring the company to pay back its loans or other credit. It’s interesting to note that banks and creditors often are cognizant that a business is headed for trouble well before the business owner is ready to acknowledge that there is a problem.

A company in distress may also show signs of decline in its typical operating metrics. These include, but are not limited to: gross profit margins, customer returns, sales trends, overhead expenses, slowdown in customer receipts or rising inventory. All of these are indicators that a business may be in need of operational or financial advice, restructuring guidance, better management, or other turnaround services. It is at this point that the business executive must act quickly to have any chance of saving their business.

Acknowledge the Issue

The most important step is for the business executive to acknowledge that there is a problem. Many companies are reluctant to acknowledge that a problem exists. Often, one issue builds on another, until all constituencies are tugging on the company. Creditors will want their money, employee’s morale will plummet, suppliers may hold back merchandise and customers may hesitate before placing an order.

The time to act is while a struggling business still has cash reserves. Once these are depleted, the struggling business rapidly loses options. The longer a company waits to correct a problem, the less likely a successful turnaround will be achieved.

A turnaround professional can quickly assess, identify and work with the business to implement operational and process improvements. They are highly-skilled in increasing revenue, reducing costs, as well as facilitating refinancing or debt restructuring if needed.

Control Cash

Cash is the lifeblood of any company. It is critical that companies get a handle on their cash position and cash needs. Each situation is unique with underperforming companies; some will be faced with a severe crunch which puts payroll at risk while others have plenty of short-term cash but continue to lose money each month. In all of these cash constrained situations, it is advisable to prepare a 13-week cash flow and create a framework to monitor the progress of the company in meeting this cash flow.

Proper cash management will determine the difference between success and failure. Key aspects of improving cash management include eliminating non-critical expenses, reducing required purchases and expenses, increasing the focus and improving the process of collecting cash while at the same time communicating with vendors as payables stretch beyond normal terms.

Make an Assessment

The primary objective of any underperforming company is to quickly get control of the business and return management’s focus to the business’ core product or service.

Each business line should be assessed accurately in order to identify which business units are profitable. Unprofitable units will need to be disposed of or terminated. These assessments also should include an evaluation of personnel and every key employee. By demonstrating effective leadership, the company should retain the best employees and thereby increase the odds for a successful turnaround.

Formulate a Plan

Based on a formal assessment , the troubled company must develop a comprehensive restructuring plan to heal the business. The plan, whether in an out of court restructuring plan or within a court overseen bankruptcy filing, must dictate the operating strategy of the company, the timing for implementing the plan, how constituents will be treated, and how the plan will be implemented.

When formulating a plan it is important to consider the following:

What are the company’s core strengths and weaknesses? Can the current business model be operated profitably?
Which business units, product lines or customers are profitable and which are not?
What processes work well and which ones need overhauled?
What are the near term cash needs and how can they be met?
Who are the important constituents and what is our plan for communicating early and often to them?
How can key customers, vendors and employees be retained?
What near term and mid term actions must be taken by whom and by when to stem the losses and begin to move the company into positive performance?

Gain Consensus

A company in distress needs to retain its credibility with all of its stakeholders. Creditors and employees must have confidence that management is diligently addressing the issues facing that business. Trust in management will be retained or strengthened each time management’s statements are fulfilled. Communication is key in achieving a consensus.

Experienced turnaround professionals work with the business to achieve such a consensus. They focus on the operational tasks at hand while working with all constituencies to implement the agreed upon plan. The dunning calls, the threats of lawsuits and the aggressive collection professionals must be dealt with effectively and efficiently.

Recognizing early that your business may be in trouble is key to a company’s turnaround success. There are options to filing bankruptcy. Turnaround professionals can offer a wide selection of business services to get your company back on its feet. One ought to manage their business health as they should manage their own – get the best help possible as soon as a problem is identified.