It’s Thursday evening about 6:45pm. It’s been a long day. Your accounting manager just brought in the preliminary results for the month. You get that familiar knot in your stomach. The numbers are not good, and they haven’t been good for the last few months. Even thought the results are preliminary, you know they are unlikely to change much. You think maybe you should not tell the CEO until you have a chance to scrub the numbers tomorrow; maybe you’ll find some mistakes that will improve the results. You get up from your desk and make that long lonely walk down to the CEO’s office. Your CEO glances at the page you hand her and she says, “We really need to sit down and come up with a plan to deal with this.” You nod, say good night, head back to your office, pack up and head home to recharge for another day tomorrow.

Sound familiar? As you ride home you think; I’ve never really been through this before in my career. I’m used to working on increasing growth. Of course, we enjoyed an unprecedented economic expansion, and I’m not old enough to remember the recessions of the early ‘70’s, ‘80’s, and ‘90’s. You chuckle and think; “it’s lonely at the top, although the eating’s better,” but that doesn’t remove the knot that is still in your stomach.

Developing A Plan
Your CEO is right. The first thing you need to do is develop a plan. Your plan will vary depending on where you are on the “Urgency Pyramid” and how fundamentally healthy your company is with regard to your strategic positioning and competitive advantage. As your company climbs the pyramid, your options narrow and the intensity, lead time and how radical your actions need to be, change. If your company is strategically flawed or weak, you may have only been surviving because “all boats float in a rising tide.” The assessment of the company’s health will determine if you need to retrench to survive the storm or restructure to live to see the sunshine again. Read More.

The Urgency Pyramid
This discussion will focus on the early stages of the pyramid. When the company begins to experience elevated distress, when bank defaults occur, when liquidity crises emerge, the options narrow and more drastic action is required.

Adverse Trends, Strategic Landscape
The financial chief should be the first line of defense. Watch for adverse trends; shrinking margins; shrinking market share; ballooning accounts receivable and slow pays; complaining sales people about competitors dropping prices, fighting hard for business; begging suppliers for early payments. Watch the behavior of competitors and talk to customers. If you don’t have a formal strategic process, you are driving in the dark.

"Cash Flow, Cash Flow, Cash Flow", the bankers song
Every troubled business plan starts with aggressive management of liquidity and cash flow. In many troubled companies, working capital management is weak. Accounts receivable collection, tight inventory control and proper accounts payable management are a daily struggle, and few companies get it right. Product pricing and customer order sizes is another fertile area. Many companies do not charge high enough prices for small lot sizes, low volume customers, and specialty items. A careful analysis often discloses that selling to these customers is not economically feasible. Premium price“up charges” are usually appropriate. Another dangerous area is capital spending. In most companies, there are more capital needs than available budgeted funds. During periods of distress, only maintenance projects and projects that demonstrate returns in excess of the firms hurdle rate (should be a healthy premium over the firms incremental borrowing rate) should be considered. The sale of idle assets or excess inventory is low hanging fruit. Maximizing liquidity and cash flow is the name of this game.

Management
Company management is tested most when the company is facing distress. The organization, even at the lowest levels, usually knows full well what is happening. The organization is hoping for strong leadership. Don’t disappoint them.

The conventional wisdom toward headcount has changed over the years. Historically, the common reaction was massive headcount reductions, usually targeted at some percentage and every department head was expected to produce a list of heads to be chopped. Unfortunately, “A” team players tended to see the writing on the wall and exit stage left. In addition, many of these players join the competition, further endangering your competitive positioning. With the“brain drain” of the current human capital market, and the evolution of “lean organizations”, the massive downsizing option is less popular than it once was. After having said that, it is important to understand that in most organizations, headcount is the largest variable cost, therefore the easiest to influence quickly. Oddly enough, in troubled times many opportunities arise to accelerate sales and marketing, and product development allowing a company to gain a first mover advantage while others are asleep; always a gut wrenching evaluation process for senior management.

Communication
An old Don Henley song hauntingly chants …. "everyone knows the ship is sinking, everyone knows the captain lied"…. . For some inexplicable reason, many CEO’s try to paint bad news rosy. Nobody is buying that! Many white collar workers fail to understand that the staff and rank and file workers are often much brighter than they are (except for a formal education). Don’t underestimate your audience. The first real leadership test is when the CEO opens his/her mouth to the organization, usually not addressing the issues
honestly and remaining silent tends to backfire down the road. The other issue to consider is delivering the message in writing. Many people go home to their significant other and try to recount what was said. Unfortunately, they twist the message and inadvertently cause distress in the home life. Remember when you are addressing your organization; half the team is not present.

Relations with the Banker
Amazing as it may seem, many companies stop talking to the bank when news is bad or covenants are violated. This is usually a big mistake. The bank needs to work through the issues with you. As conditions deteriorate you risk having loans accelerated, turned over to special assets, and/or face forbearance challenges. All of these options are ugly. Talk to your banker; make him/her part of the process.

Weathering the Storm
Every company’s situation is different and every business has different strengths and weaknesses. The senior management team needs to row together in troubled times and show employees and customers the smart, strong leadership that crave and deserve.

If your team approaches the challenge in a calm, thoughtful way, the chances for success increase exponentially. Good luck!

Author
Bill Maloney
April 12, 2008
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