Business headlines over the past year outline the problems in the real estate market, the high cost of energy and the resulting impact of these issues on a number of industries. Consumers also have been hit hard by the ripple effect of energy costs, such as the levying of fees by airlines and the high cost of gas at the pump.

The subject of alternative energy sources recently has become a popular one at cocktail parties and martini bars, and, most recently, in political campaigns. Unemployment, although fairly low by historical standards, is creeping up and having a further negative effect on consumer confidence, providing added drag on the economy. Financial institutions and retailers also have recorded significant negative earnings in recent months, another indication of the soft economic conditions.

CFOs and controllers should be proactive, looking for signs of distress in their own companies, perhaps brought on by some of the previously mentioned factors, or the ripple effect of the general economic malaise.

Many of the challenges referred to here can be rectified easily with additional capital from outside sources such as investment bankers, lenders or others. However, in the current business climate, obtaining capital can be very time-consuming and expensive, especially if your business is exhibiting signs of distress.

Some clear indications your company may be in distress or in need of restructuring include:

• Declining cash flow and/or profitability for extended periods
• Strained banking relations often perpetuated by loan-agreement defaults or covenant violations
• Externally imposed factors such as tightening of credit by lenders because of prevailing economic conditions (i.e. reduced or nonrenewal of lines of credit)
• Loss of trade credit from vendors possibly because of slow payment or non-payment of trade obligations
• Changing market conditions resulting in new and possibly more efficient competitors
• Loss of customers because of a lack of products offering breadth or an outdated product delivery system
• Higher-than-usual employee turnover

Companies in the early stages of a downturn either may not realize they are experiencing distress, or may realize it and expect the situation to be temporary and self-resolving.

Management may not understand the financial and/or information reporting functions require improvement or may be overburdened and not providing sufficient tools to highlight unfavorable business trends. These early stage turnaround candidates can access a variety of potential service solutions in the turnaround/restructuring arena such as consulting firms specializing in revenue enhancement and cost reduction solutions, large investment-banking firms, many national accounting firms, and large national turnaround firms that often replace most or all of the upper management team in an effort to completely restructure the company.

Organizations with sound business plans, solid market presence, competitive products, strong upper management, and only one or two of the previously mentioned warning signs, may find that augmenting the CFO office on an interim basis to assist with the burdens and uniqueness of financial distress may be a more cost-effective and lessintrusive approach.

Because the CFO in most healthy companies is under-resourced and overburdened, when they are faced with the additional requirements inherent in a distressed business, a re-prioritizing of tasks often takes place, usually at the expense of day-to-day operation oversight, where his/her knowledge of the business is most valued.

One solution is to consider enlisting a turnaround specialist with experience in all aspects of distressed companies. This additional resource can permit the daily operations to move forward smoothly while the specialist focuses on required restructuring tasks such as renegotiating debt and covenants, identifying sources of refinancing, detailed cash flow modeling, etc.

Professionals in this space typically have significant background in asset management, expense reduction, revenue enhancement, refinancing, transactions, and transition management. These professionals also may have experience in bankruptcy process, litigation support and expert witness testimony and can assist upper management in these areas if required. Because of the array of challenges in a distressed company, selecting specialists with access to the right team or professionals including legal, accounting and investment banking will significantly improve the likelihood of a positive outcome for the business. Listed below are suggested sources for professionals with restructuring and turnaround skills.

Turnaround professionals can be expected to help analyze the financial information of the company paying attention to the reliability and timeliness of the information generated, and providing regular feedback to upper
management. The turnaround professionals will thoroughly review the business model of the company and provide comment regarding threats to successful attainment of stated company objectives. The company should expect to receive, at a minimum, work products such as a 13-week cash flow statement, a comprehensive financial (and operational) plan, and a detailed action plan from the turnaround professionals. Continuous communications with all upper management regarding progress against financial and operational plans also is a key ingredient to a successful distressed business engagement.

Early detection of distress by the CFO is critical to a successful outcome, and may permit the company to invoke a less invasive turnaround strategy. By engaging specialists that assist the CFO and CEO in dealing with identified signs of distress, the company may avoid a more comprehensive turnaround engagement that could require more drastic measures of “righting the ship,” such as replacing existing management. Taking action promptly when signs of distress are evident also may help the company avoid a bankruptcy reorganization or liquidation, processes that can be very time consuming, costly and emotionally draining.

If you believe your company may be experiencing signs of distress, you can seek help by contacting either the Turnaround Management Association (TMA) or the American Bankruptcy Institute (ABI) for a list of qualified professionals in your geographical area.

Fred Brown is a Partner in the Florida Restructuring Practice of Tatum LLC and a member of the Turnaround Management Association.