Financially Re-engineering the Company
Turning a company around is simple, not easy, but simple. It is a straight forward principle-guided process.
Periodic Financial Restructuring
Every company at some time requires a financial reset or turnaround. Financial re-evaluation is part of the natural evolution of a business as it moves through life its cycles. Sadly, many companies fail to evolve following a shrinking market or stagnant customer base, following their product's life cycle into a financial abyss. Then there are those companies where a turnaround is required as the result of self-inflected financial wounds, but blamed it on slow sales, poorly thought through plans, increased competition, poor products/services etc. Continuous bad decision making and implementation processes place companies in a detrimental position requiring a financial turnaround.
Corporate financial restructuring principles are independent of size. Unique to large companies are the availability of resources both inside and outside the company to support a financial turn- around. Having plenty of resources are both a blessing and curse. A large size allows for more mistakes and decision-making complacency. The need for financial restructuring exhibits symptoms of instability often manifested as detrimental internal politics, fiefdom building, conflicting objectives, and cash not achieving its objectives. Conveniently, the initial assumptions about the business’ core values and critical objectives are forgotten in the confusion. Everyone drinks the Kool-Aid of business growth and its unlimited future, neglecting to balance today’s cash requirements with tomorrow's opportunities. Cash problems are recognized only by a few select managers. Customers, organization output, and financial results are becoming increasingly disappointing. Everyone is sure that if we work harder, we can produce the required results. When more becomes less, the situation is degenerative.
Financially degenerative situations often place tactical and strategic objectives at odds with each other. Management mortgages tomorrow for quick cash today, because they are wedded to objectives which are no longer attainable. Companies would rather borrow to finance today and meet cash flow problems rather than fix the real problem. In my financial industry, we are all too willing to offer "new debt" to fix old problems and ill conceived new business opportunities. The industry never tells companies you cannot borrow your way out of debt. Instead we give you the “business crack” of new debt (Dominguez, 2016) to keep your company going until we own it.
"Business crack” is offered to all size companies. Financial restructuring is required when mid-size companies find that their customer’s base is too small to support growth objectives. The creeping excellence of management fails to see that new objectives are required with a newly focused budget. Instead management refuses to terminate, re-purpose, and restructure unproductive people, liquidate low yielding assets, devalued inventory, eliminate low yielding customers in order to reallocate cash to higher yielding activities. Companies rarely bother to re-prioritize and eliminate the less productive consumers of cash and resources. These challenges are masked in large companies because of the amount of resources. Such is not the case with smaller companies.
Small companies have their own unique antecedents that indicate a looming financial disaster. Symptoms include no real paying customers, inadequate cash flow, CoD vendors, AR-deep discounts, stagnant revenue, and decreasing profit margins among others. Everyone works harder and longer hours, but the needed company-saving results comes slowly or not at all. Your best people slowly burnout. The optimism used to start and grow the company has become counter-productive. The cash creation decisions requiring broader perspectives and more diverse opinions are left to intuition and incremental thinking. Your company is on its way to burn-out or hooked on "business crack". Management may not even see its demise coming until it’s too late.
So what can one do?
Where’s your Financial Canary?
How do we know when your company requires a financial turnaround before the situation becomes unrecoverable? The answer lies in two areas: internal operations and external market metrics. Believe it or not, here metrics really do help. They are the “canary in the coal mine”. Executive management should not rely on getting bad news fast enough in staff meetings. The internal key metrics are days-liquidity, debt service, profitability, book-to-bill, and revenue–to-total cost ratios. Management should have their own set of early warning financial health indicators. Financial management can help build a relevant dashboard. Walk around with your own "dashboard". The use of these simple tools does wonders. Early warning financial and operation metrics will help keep you out of trouble.
One of the first turnaround symptoms is the lack of awareness of real operating and market expansion costs. We tend to see costs as expense. This is wrong. Cost is the utilization of resources to achieve an objective. Sadly, we see cost as becoming increasingly disconnected from cash flow and people. People generate only cost, not cash, nor revenue, nor profit. Companies tend to launch into cost cutting binges to increase profitability by deferring activities, projects, and purchases. Corporate cost cutting is generally reactionary. Management forgets about people and the word "eliminate". Companies mistakenly defer, rather than eliminate objectives, projects, and tasks. Other approaches include people layoff, but the company never stops the activity associated with those laid-offs. Worse yet, companies cut costs assuming other previous activities were right to begin with. This is a dangerous activity based on a false assumption. Rarely are assumptions about the future reexamined when cost reduction efforts are launched. Companies stubbornly rely on what worked for them in the past, including their own intellect. Management "backs into the future with their eyes firmly fixed on the past".
Turning around a company requires assumption testing, effective financial decision making, a real plan, and communications together with control of cash and critical assets. If anyone of these items are missing, it compromises the financial turnaround.
Test Your Assumptions
Assumption testing should always be the first consideration in a financial turnaround. What is known and how it is known facilitates the type of reflection that mitigates bad decision making. The propensity for companies to do what has always worked is rarely questioned when financially restructuring. We fail to realize that management was doing the best they could when everything started going wrong.
Assumption testing includes how decisions were made. Often companies get into trouble when they start making too many marginal decisions based on untested assumptions. These stack up until disaster happens. It’s the "frog boiling" syndrome.
Effective Financial Decision Making
Not all decision making is effective. Arguably most decisions are not. I am often surprised at how little management understands about effective decision making. The lack of required business results and ineffective decision making are linked. Most business decisions seem deceptively simple, because we are constantly making decisions in our personal lives. However, business decisions are different. The magnitude of economic impact and logistics involved required to change corporate direction and resource commitment must include new scrutiny. To do less invites failure.
I often write and speak about making business decisions; a Peter Drucker acquired habit. Decisions are choices among alternatives among alternatives. Drucker argued that if there are no alternatives, then there is no decision to be made. The word “choice” is important. It is a choice requiring judgement. Decisions can only be made in the present. There is no such thing as a future decision. Future decisions are only intentions. Decisions are characterized by action that changes direction. This suggested that every decision is about the futurity of current actions. This means that an effective decision commits resources and changes direction moving forward. Further, without resource commitment there is no decision. Decisions without resource commitment are ineffective. Ineffective decisions waste time and resources. Deceptively, they only offer the appearance of corrective action, progress, and control.
Control of Assets
Lecturing executives on cash's impact and management processes is often a waste of time. Most executives understand these items. However, few executives fully appreciate the use of leverage to generate cash and financial control. Disappointingly, cash-management has become an oxymoron. Cash management degenerates to cash-denial. Missed are the real consumers of cash; people. People generate only one thing with certainty; costs. Cost judiciously applied can generate the required business results, i.e., value-building milestones. While may be viewed as assets, they hate to be controlled. It is false logic that people generate cash, revenue, and profit. It is the effective utilization of all assets that generates these items.
Cash management and its control are better understood as oxymoron. It is a false assumption that because we measure, we can control. We seek control to influence outcomes. There is little doubt that the use of every conceivable cost accounting and financial reports imaginable did little to save some of the most spectacular corporate bankruptcies in history (e.g. PG&E, GM, Sears, Blockbusters, Conseco, Lehman Brothers etc.). Their unrealistic financial plans and new budgets did little to effectively focus operations and control cash. This is because while processes can be controlled, people cannot. People require leadership (not control). Financial leadership starts not with plans, but rather the leadership of people in the planning process.
The Financial Plan for Restructuring
Creating the financial plan is a process. Financial plans don’t start with financial and accounting data, but rather with customers and market data. The best accounting and financial planners stay in touch with the market and customers that support their company. They spend time in the marketplace, not just reading about it. They develop a sense of tempo, pressure points, emerging trends, and marketplace resources to develop and implement the right accounting and financial strategies that support a turnaround plan.
The turn-around plan is critical not because it is predictive. No one can forecast the future with any real accuracy. Rather plans are all about making sure you have placed the most important resources on the most important objectives. The plan utilizes the allocating, controlling, and monitoring of key resources together with interactive decision making to achieve objectives. The new turnaround budget should reflect the strategies that achieve the sought after results. In its most basic form "strategy" is "leverage". Without leverage implementation become a voracious consumer of resources. The resulting balance sheet, income and cash flow statements, along with ratios are indicators of the strength of strategy employed provide interactive opportunities for finance and accounting personnel to demonstrate the leadership to help guide a company.
Summary
I am often embarrassed by my own industry’s inability to come to grips with what finance is and is not, as well as its role in a corporate growth and turnarounds. Finance is a tool and process for making good economic and market-based business decisions. It is far more reaching than debt, equity, ratios, reports, currency, assets, derivatives, exchange rates, etc. It is integral to every turnaround and broader than any technique. Its outside market importance is as critical as its internal importance. It can turn a company around increasing its cash flow, profitability, and revenue. The need for financial restructuring can be motivated by distress, shifts in markets, or new opportunities. A corporate financial turnaround starts with assumption testing, effective decision making, cash generation and management that support the restructuring plan. The plan requires financial and accounting leaders who are willing to embrace the challenge of restructuring for growth.
Dr. Willis is an INC 500 President with international experience. He has served as President and EVP of Marketing for several high tech companies. Passions include reading, mentoring, developing disruptive strategies, and pioneering new markets. He holds a PhD in Finance, MBA, and BSEE.
