More than other C-level executives, the CFO is often the first C-level executive to spot potential trouble on the horizon. The numbers tell the story, and the CFO is the keeper of historical numbers and projections. When the numbers start to indicate that all is not well and the organization appears to be entering heretofore unknown territory, it is the CFO who needs to stand and help lead the way.
Most CFOs, even the most competent, have little or no direct hands-on experience in the many nuances of a turnaround situation or cash crisis jeopardizing the existence of the organization. The following are some points to consider based on first-hand observations made at companies.
The important first step is to fully recognize and accept that there is an underlying problem with the business that needs to be dealt with eyes wide open. When things are going smoothly, the CFO’s role in the business is, while not easy, pleasant, profitable and cash-flow acceptable; the annual independent audit is routine; bills are paid on time, and the morale of a thriving business is generally good. Lenders are at peace. When all or most of the above change, the CFO needs to apply different mindset, skills and management style.
Cash is the lifeblood of the business. When times are good, organizations tend not to be as disciplined with cash. The CFO needs to look deep into the bowels of the organization to find cash leaks that need to be closed. Some areas to look at include:
- A review of all purchase orders to check that money is being spent wisely
- Whether cash is reasonably positive and accumulating cash in a reserve
- Selling non-performing inventory and idle assets, regardless of the book loss. Too often, businesses in trouble are reluctant to sell unneeded assets for fear of book losses.
- Putting a hold on capital unnecessary expenditures
- Initiating a cost/benefit analysis of marketing and advertising costs
Staying Ahead of the Curve
The CFO should develop contingency and “what if” plans as soon as it becomes apparent that choppy waters might be ahead. A troubled situation does not get better with passage of time.
With the exception of the CEO, the CFO is typically the only executive with the platform (e.g., responsibility for financial statements, projections and cash management) to delve into any aspect of the organization to determine what is really going on in. Sales, margins, operational plans and efficiency are all areas where the CFO can foray in on a need-to-know basis.
Don’t be swayed by overly optimistic thinking such as, “Don’t worry, we’ve been through this before,” or “It is not as bad as you think.” When it’s time to sound the alarm and call to action, it is better to be too early than too late.
Zone of Insolvency
In a recent engagement, I was appointed chief restructuring officer of a mid-market manufacturing company experiencing severe cash difficulties. The management of this closely held business had been fighting hard to maintain viability. While meeting with the CFO to review next week’s potential cash receipts and needed cash disbursements, the CEO came into the room and announced that he was able to talk the largest material vendor into significantly increasing the credit limit. I cringed. The CFO and I were struggling to maintain operational integrity without causing any vendor to have increased financial exposure.
While the increase in credit limit would enable the business to struggle for a few weeks, the ultimate outcome, in my opinion, was already written in stone, and the likelihood that the vendor (a family-owned steel supply company) would be repaid was remote. This was a troubling moral issue, as well as a legal issue. The courts do not look fondly on debtors (or lenders) that initiate action at the expense of company creditors when a business enters into the “zone of insolvency.” Complex legal issues surround these two matters. Legal counsel should be brought in to weigh in early on.
Strong Lender/Workout Officer Communication
In light of the losses many banks and commercial finance companies experienced during the Great Recession, “antennas” are now sky-high. Lenders have a tendency to act quickly to address potential problems before the situation gets out of hand. The first step with most lenders is to transfer control of potentially troubled loans to workout officers. Their job is to collect money, not to loan further funds.
Companies should meet with the workout officer as soon as possible. It might be difficult to provide information indicating problems, for fear of lender questions/concerns, but an open dialogue and strong follow-through with action plans and clear information will go a long way to start a productive relationship with the lender’s workout specialist.
Retaining a Turnaround Advisor
Unless the CFO has recent and hands-on experience in driving a turnaround, a turnaround advisor should be retained early on. However, a business may resist the help, seeing it as an unnecessary expense or because of corporate ego. A veteran turnaround advisor can provide seasoned insights, perspective and specialized knowledge that are helpful in obtaining the support of customers, vendors and lenders. For many troubled loan situations, the lender’s workout specialists will pay heed to what the turnaround advisor says.
In Distress to Success,1 Bobby Guy, a restructuring attorney with law firm Frost Brown Todd says,
“…it is hard to accurately perceive a company’s true health when financial distress hits and existing management is too close to the situation. Too often, managers decline outside help until most good options have already evaporated…”
When selecting a turnaround advisor, first look for strong recommendations from other businesses. Next, look for personal chemistry. Be wary of potential turnaround advisors or their firms claiming hundreds of turnarounds without failure.
Achieving the Best Outcome
At times, industry dynamics have changed (offshore sourcing, distribution, competitor technology, etc.), and the business is no longer able to compete effectively. The business wants to and should put up a spirited effort to stay relevant in the marketplace, nothing will be gained if the company’s business model is no longer competitive in the market. Fighting on to the last man (or last dollar) and going down with the ship might be good script for the movies, but such actions in a real-life business situation only serve to diminish or destroy value.
Management authority Peter Drucker said “most turnarounds don’t.” Today the success rate is much higher, now that the issues with troubled/failing companies have been widely studied, and a profession of turnaround advisors and restructuring specialists has arisen. Still, an effective turnaround in business is not easy. The organization needs to act quickly with discipline, purpose and conviction. Other than the CEO, the CFO is in the best position to establish the framework and platform to achieve the best outcome.
1. Guy B. (2011) Distress to Success: A Survival Handbook for Struggling Businesses and Buyers of Distressed Opportunities. FreneticMarket Press.
Ken Naglewski, principal of The 180 Consulting Group, provides professional services in the areas of turnaround advisory, business strategy and executive coaching. He has filled senior roles of CEO, COO, CFO and CRO. He holds designations as a CPA, CTP and CIRA (Certified Insolvency and Restructuring Advisor). Naglewski is also a partner in Seabiscuit Partners, a boutique merchant banking and financial advisory firm. He can be reached at 615-491-7331 or at Ken@the180degreeconsultinggroup.com.