Is your business in a state of crisis? Are you lying awake at night in search of the answers?
I apologise if this sounds dramatic, but a failing business can be a very dramatic and stressful matter, particularly when it is that business that puts food on the family table, or it is the success or failure of that business which will determine whether the family gets to keep or lose the family home. Yes, this is a very serious and dramatic matter, and it should be noted at this point that the literature suggests that fewer than 30% of companies in crisis fail to successfully turnaround and get back to good health.
You would also be correct in believing that I am trying to be quite an alarmist in this message. The reason for this is simple – most leave it too late to take action, and it is only through the advent of a significant event or some other good ‘wake-up call’ that people tend to move to action. If I achieve little more than to get you to stop and think about your situation, and hopefully take action now, then this article and my efforts have been well rewarded.
In recent articles, I have dealt with the subject of businesses in decline, symptoms of crisis and the characteristic of a business in crisis, so if unsure of your circumstance may I suggest you cast an eye over these articles, however intuitively you will know if you are in the ‘doo doo’ or not. The question now is what to do to fix the situation, in that I mean to stabilise the crisis, or simply stop the bleeding.
The first thing I normally do when going into a business crisis situation is to take a hard look at the leadership team, after all, it is under that team that the business came to find itself in crisis, it is fair to ask some hard questions of management. Many turnaround specialists advocate the immediate replacement of the leadership team, as in many instances they are the cause of the crisis. However, my experience it is not so straightforward in a privately owned and managed family business.
You will have often heard about the importance of ‘implementation’ in business, and it is never more important than in a crisis management and turnaround situation, as it is at this point that you need to work out exactly what has to be done, how to do it and who should be entrusted with doing it. This must take place within tight timeframes, towards exact desired outcomes, and there is no room for error. Furthermore, it is at this stage that the concept of stakeholder management and communication is amplified ten-fold, as key creditor-led stakeholders could spell the end of the company with the stroke of a pen.
In my previous articles I wrote on the symptoms and causes of decline and crisis, now is the time to go for the jugular. You must identify and decisively tackle the causes of your business’ decline and crisis. It will not be enough to fine-tune at the margins, procrastination and dilly-dallying will spell certain death, rather you will have to cut deep and administer enough medicine to ensure that you resolve all of the key issues quickly and sustainably.
Please don’t get me wrong, the objective cannot be to tackle every issue, as that will equally spell failure as the company most likely will not have the time or the required resources to do so. The objective must be to quickly identify the life-threatening issues and to address them first in a decisive manner.
Synonymous with a business crisis is a rapidly worsening cash position and a lack of management control, go figure! What we quite often find is that management is paralysed in the face of what may seem like a hopeless situation, besides it is also our experience that management loses confidence at this stage and does not know which way to turn.
Your immediate objective must be to conserve cash, rebuild stakeholder confidence and reintroduce a semblance of predictability into the business. This is a time for very strong top-down control, not a time for wishy-washy and uncertain leadership. Having said that however you as the business owner-manager will have to be consultative in your approach and pull key members of your leadership team into the decision-making process to bring about stabilisation and ultimately change. So be strong, directive, but also consultative and collaborative in your leadership style.
Move quickly to impose a firm set of controls on the business, and immediately put in place a rolling three-month cash flow forecast. This must be seen as one of your key tools for managing the business out of this crisis situation. Your stakeholders, most notably the bank, will want to know bi-monthly what your exact financial position is and what future cash flow is expected to be. Communication with key stakeholders through this stage is vital as happy and well-informed creditor-stakeholders will be inclined to give the company time to recover and may even be prepared to offer further assistance to the company. An unhappy creditor-stakeholder may pull-the-plug on the company to take control in an effort to preserve what little creditor value there may still be left in the company.
Your first challenge will be to generate enough cash to survive in the short-term. Usually, this means generating enough cash to pay key creditors, usually the bank, primary suppliers and the ATO, and/or it could mean being able to cover employee wages that are falling due. In every case, the need will be to keep these people happy, and that will take cash. Failure to pay could result in formal insolvency proceedings.
In almost all of the crisis situations we’ve dealt with, there have always been ways to generate cash, with surprisingly little impact to the operations of the business. It is surprising how effective it can be to just introduce well-structured cash flow forecasts and cash management measures into the business. This measure alone often results in an improvement in cash flow without having to take any further cash generation actions.
As a business owner-manager in a crisis you need to immediately initiate three key tasks:
- Assess your business’ immediate cash requirements;
- Develop an action plan of cash-generation initiatives; and
- Establish and implement emergency cash-management controls.
The assessment of your business’ immediate cash requirements
The construction of a three month ‘rolling’ cash flow forecast will quickly point to the extent of the measures you will have to take to generate the required level of cash in your business. We often use this as a reality check with our clients as it is critically important to draw the big bold lines in the sand, as at this point many business owner-managers are self-funding their business out of personal assets and lines of personal credit, and it is important to get a clear understanding of continued appetite to do so and at what pre-identified point the turnaround team will need to call an end to the effort, otherwise the failing company will drag the family assets down the drain with it.
The cash flow forecast must be done on a strictly cash receipts to cash payments basis, using a revised and carefully scrutinised balance sheet as the starting point, as the critical items in helping to generate cash will be the ‘working capital items’, balance sheet assets and capital structure. This is an intricate and complicated process, which given its importance as your starting point in this important process, should be carried out by a suitably qualified professional.
Another point to remember is that your cash flow forecast will require that you formulate a ‘sale or revenue forecast’, and it is best to err on the conservative side when formulating these sale forecasts as your key creditor-stakeholders will not take well to any under-performance to initial forecasts.
It is now time to develop potential cash-generating initiatives
You will need to determine whether you need to sell the ‘kitchen sink’ to generate as much cash as possible in the short term or if you have the latitude to keep some initiatives in reserve. Where cash-generating initiatives are clearly and realistically identified and shared with the business’ bankers the bank may be prepared to work with the business in providing short-term ‘bridging finance’ whilst these initiatives are being enacted, which they will of course only do if they trust management and see themselves as party to the solution.
A full list of potential cash-generating initiatives needs to be compiled and accompanied by the associated cash benefits and costs. Some cash-generating initiatives will, in fact, cost the business to implement, this needs to be taken into account and each initiative very carefully considered.
Implement emergency cash management controls
Implement emergency cash management controls to ensure that the business is managed in accordance with the short-term cash flow forecasts, and that identified cash-generating initiatives are successfully implemented. This will require strong cash management controls, that you dedicate a part of your time to managing the cash in the business, and that you ensure that ongoing ‘quality’ reporting and forecasting systems are in pace. The size and complexity of your business will determine the level of control required and the resources available to support this process.
Where possible you should revoke or substantial curtail spending authority, introducing spending limits and levels of authority. Another good discipline is to initiate a regular meeting of all in the business involved in the cash management and control process. These meetings bring focus to the importance of cash management and builds accountability amongst the team members.
STRATEGIES THAT CAN GENERATE CASH IN THE SHORT-TERM.
There are six primary strategies that you can apply to generate cash in the short-term, namely:
- Reduce debtors;
- Extend creditors;
- Reduce stock levels;
- Put a stop to all planned expenditure;
- Sell assets; and
- Secure short-term financial support.
The management of overdue debtor accounts can make an immediate and sizable impact on cash flow. By reducing outstanding debtors you are essentially putting money in the bank and reducing funding costs. Tactically you may want to offer early payment incentives, explore the selling, or factoring, of your debtor book, renegotiating terms with your customers, prioritising production for your better-paying clients and encouraging customers to pay a sizable deposit in advance. The simplest thing to do of course is to get on the phone and ask debtors for the payment of overdue balances.
You may seek to extend your payment terms with creditors. This should be approached with care and well communicated with affected creditors as you will want to maintain healthy relationships with these creditors, which are often suppliers to your business.
Generating cash through the reduction of stock levels can prove to be a significant opportunity for the business, with a particular focus on obsolete, slow-moving and excess stock. Where possible negotiate with suppliers to return excess stock to them for a cash refund or credit.
Where possible you should put a stop to planned expenditure. This will require that you conduct an urgent review of all planned expenditure and that you carefully assess what is essential and what can be stopped. As a rule, all discretionary spending should be stopped with immediate effect, and management should have to re-motivate the required expenditure against a strict set of criteria. At this point, you may be able to reduce planned costs by negotiating a reduction in supplier costs and employee wages. It is important to bear in mind that if you plan to reduce employee costs through a redundancy program that this will come with the hidden costs associated with those redundancies which the business is obliged to pay.
If it becomes apparent that the cash generation activities discussed above are going to be insufficient you will then need to go in search of external financial support. The most obvious first port-of-call is the banks, however, most often they too have reached the end of the line at this stage. You may want to think more broadly now and consider external equity shareholders or debt funders that you could approach for additional financial support. We encourage clients to be innovative in their thinking at this point as ordinary shareholders are normally very risk adverse and have a profit imperative, so will seldom want to invest in a business that is on its knees. Those that will are most often very closely related to the business owner-manager, and as such have thrown all solid investment criteria out of the window. Furthermore, there are many strategic implications to take into consideration when introducing external equity shareholders, not least of all are voting rights and the question of dilution. For that reason, we encourage clients to consider different types of instruments, which have different characteristics and different rights attached to them. These may include non-voting shares, redeemable shares and convertible notes, to name only a few out of a sea of possibilities. This is a very complex arena which comes with far-reaching implications, and so we strongly recommend that you seek professional advice in this regard.
New management and financial controls
As parents what do we do when children are not playing nicely with their toys and fighting, yes we take their toys away. Business is no different, we take away the chequebook. The simplest way to take control is for you to sign all cheques and authorise all payments. If you are the problem you will need to rely heavily on your turnaround advisor for guidance in this regard.
By taking the chequebook away not only do you get to control expenditure but you also get the opportunity to closely scrutinise all expenses going through the Business, which can be an eye-opening experience.
On occasion, we have recommended to clients that they remove their top management as it was blindingly obvious to us that they were the main problem. We would therefore encourage you to carefully consider your incumbent management team and to ask yourself honestly – Is this person, or people, my problem and will they be successful in helping me deliver the solution? You must be brutal and totally detached in how you answer this question. From experience, I can share that most successful turnarounds owe their success to strong, determined and inspirational leadership, qualities the incumbent management team can seldom muster-up.
Put a freeze on all new staff hiring
We invariably espouse the need to reduce headcount as most companies are overstaffed, refocus roles and responsibilities and to engender a philosophy of ‘stretch’, or working harder through this stage. Good people will roll up their sleeves and make a difference, and the bad apples will fall from the tree. This is in fact exactly what you want, to move from a position of inefficiency and low productivity to optimal productivity with the resources that you have on board. This is the concept of ‘leverage’, or being more resourceful with the resources you have, rather than wanting more resources to do the job. And of course for those staff that remain, you will want to pause all planned salary increases and promotions, decisions that can be revisited at a later date.
Put a ban on all capital expenditure and the entering into of new purchasing contracts or orders, as these activities place demands on the business’ future cash flow and may cause unnecessary additional challenges to the turnaround effort.
The first round of cost reductions
You’ve now taken the chequebook away, taken control of expenses, cleaned up management, put cash management controls in place and initiated a cash generation process. At this point you need to go through your P&L with a fine toothcomb in search of cost reduction opportunities.
This is a relatively easy exercise for the experienced business person, however, our experience has proven that reality is often clouded by emotion and stress at this point. As previously mentioned many companies are overstaffed, and this is often where the biggest expense savings are to be made. However, it is very often extremely difficult to get business owner-managers to agree to let go of staff who they have built up relationships with over many years in some cases.
Admittedly, there is a fine line between removing excess staff and cutting too far. This requires extremely careful thought. As mentioned earlier you will need to think carefully about redundancy cost implications and devise a suitable strategy, this often requiring consultation and agreement with the affected staff members.
In certain businesses, purchasing can be the single largest cost item. You should aim to reduce purchases where possible or negotiate better pricing and terms with your suppliers, not forgetting that the services full-time employees provide the business, the services of temporary staff and the services of sub-contractors are all in effect purchases that can be renegotiated and reduced.
Finally, there should be only one channel of communication with key stakeholders and the staff body, and that is you.