Insight Magazine
September 2, 2003Source: Insight Magazine
"In the Eye of the Storm: Steering your corporate ship through perilous times means preparing for bad weather before the storm clouds even gather. " by Sheryl Nance-Nash
September 3, 2003
5:00 pm ET
(September 3, 2003) There's nothing like being out at sea in the middle of a storm. When the tide rises—whether financial distress, fraud, or manmade or natural disaster—all eyes are on you, the CFO. How you navigate the waters will mean the difference between survival and wreckage. Here's how to stay afloat.
Financial distress usually doesn't happen overnight, though it often seems that way to a CFO. Nevertheless, experts insist there are key warning signs that should be a wake-up call for any CFO.
"When you run out of cash, it's too late," says Bill Hass, CEO of turnaround and consulting firm TeamWork Technologies in Northbrook, Ill, and a Certified Turnaround Professional (CTP). "Long before the cash crisis, there were indicators, chief among them being a crisis among your customer base's industry, competitors continuing to outperform you, or increases in negative trends in your financial statements, including sales continuing to trend downwards, along with profitability and growth margins.
"Other warning signs may include excessive debt, inability to meet debt covenants and poor cash flow," Hass explains, adding that, "Management is often in denial. Companies sense distress, but they believe it is short term and that performance will improve on its own. Management says, ‘Oh, we've lost customers before and survived.’ But they fail to realize that some structural changes in the industry have occurred and the good times may not return without thoughtful intervention."
When the red flags begin to wave, decisive action is the only means of salvation. "You have to assume the worst and take action, instead of doing nothing," says Randall Eisenberg, CTP, chairman of the Turnaround Management Association headquartered in Chicago, and senior managing director at FTI Consulting, Inc. in New York City.
"Time is a more precious commodity than cash," says Kaleil Isaza Tuzman, president and managing partner of Recognition Group, LLC, a consulting firm in New York City. "The sooner you attack the problem, the better."
The exact plan of attack will depend on the company's unique situation, but there are various options. "It's not in the bank of creditor’s best interests to see you go out of business. If you're open with them, and hopefully you've been working the relationship all along, you can negotiate with lenders and creditors to obtain new debt packages or ask to change covenants," says Jack Raiton, former CFO and current head of the Oregon Health and Science University’s OGI School of Science and Engineering, Department of Management in Science and Technology, Portland. Take a close look, too, at your costs—allocated versus true. Allocations are often in error, says Hass. "Cut the fat. While you might think it heresy to get rid of customers, in reality, some may be causing you losses or cost more than they are worth. Find a way to delicately let them go and replace them with more profitable ones. You may consider cutting the headcount by at least 15 percent, but you may have to go deeper and make changes among top management."
During financial distress, the monitoring and management of liquidity might move from a monthly exercise to a daily process. One of the CFO's primary objectives during this difficult time is to ensure cash is available to meet obligations. Your contingency crisis liquidity plan should be put in place when times are good, says James Lam, an adjunct professor of finance at Babson College in Wellesley, Ma.
Rita Gallagher, a financial consultant with The Johnsson Group, a financial consulting firm based in Chicago, says selling assets, or part of the company, filing bankruptcy or dissolving the company might be other options, depending on your goals. "If the company is public it has a fiduciary duty to shareholders, or if private the company may feel that it has more responsibility to employees," she says. What you don't want to do, she continues, is be overly optimistic about the company's future. "If you try to keep it going for two years before selling and the company's value plummets, you won't be able to get what you could have, and that loss could deprive the company of opportunities to revive itself."
As with all crisis situations, disclosure is a delicate issue. "Critical constituents should be informed about what is going on. Lenders and others will want clear communications concerning the severity, what you will do to remedy the situation, and in what timeframe. Don't wait for the lender to raise the issue. You'll compromise the credibility and relationship further," says Eisenberg. Furthermore, if you don't talk about your financial difficulties, the market may make assumptions on its own. "People might figure that you're bound for bankruptcy, then your stock goes down. Before long, perception becomes reality," says Tuzman.
Know that when a company is under performing, the CFO will receive some of the criticism because he or she didn't identify the severity of the company's financial status quickly enough. It's on you to right the wrongs. Says Eisenberg: "The CFO needs to step up and take a leading role in raising awareness, a sense of urgency and correcting the situation."
Contact:
Recognition Group, LLC
212/774-3700
Source: Insight Magazine, September 3, 2003