Description
Keys to operational and financial restructuring of smaller companies Alvarez & Marsal and McKenna Long & Aldridge, LLP.
Keys to operational and financial
restructuring of smaller companies
Alvarez & Marsal and McKenna Long & Aldridge, LLP
Moderator:
Gary Marsh – McKenna Long & Aldridge, LLP - Partner
Panelists:
Bill Runge – A&M- Managing Director, Head of South Region
Lawrence Hirsh – A&M- Managing Director, Atlanta
John Makuch – A&M- Managing Director, Atlanta
The Situation
Copyright 2014. All Rights Reserved.
Paths of a Turnaround or Restructuring
Copyright 2014. All Rights Reserved.
Time
Non-Crisis
Crisis
Sustainable
Recovery
Mere Survival
Short-Term
Survival
Failed Turnaround
Insolvency
Financial Position
Turnaround
strategies adopted
The transition to a Crisis can take weeks, months or years
depending on many factors, such as:
– the industry
– the degree of indebtedness
– the availability of capital
– the nature of the causes of poor performance
Source: Corporate Recovery: Managing Companies in Distress, by Stuart Slatter & David Lovett
Causes of Distress
Copyright 2014. All Rights Reserved.
External Internal
Capital Structure / Leverage
Changes in Market
Demand
– Housing market
– Coal industry
Competition
– New competition
– Change in relative
competitive position
– Brick and mortar retail vs.
online
Change in Costs
– Adverse change in
commodity prices
– Disconnect with customer
contracts
Poor Management
– Not necessarily
incompetence but poor
team dynamic
Inadequate Financial
Control
– Failure to identify declining
performance and take
action
High Cost Structure
– Fixed costs may have
increased as a result of an
attempted growth push
Loss of Talent
– Or mis-alignment of
resources due to
management changes
Poor Marketing
– Lack of focus on selling and
marketing efforts
Big Projects /
Acquisitions
– Poor integration
– Distraction from core
competencies
– Drain on financial
resources
Crisis Indicators
• Turnover in key positions
• Loss of credibility with stakeholders
• Lender tightening borrowing lines
• Vendors requiring COD/CIA
• A/P increasing
• A/R aging
• Ineffective forecasting
• Lack of coordination between sales and operating departments
• Production problems
• Deferment of major repairs
• Forecasts which depend on unrealistic home runs
Copyright 2014. All Rights Reserved.
The #1 indicator of a crisis or that a crisis may occur is the inability of management to
fully acknowledge its problems and to articulate a clear path to resolution.
Impact of a Crisis on the Organization
Copyright 2014. All Rights Reserved.
A company’s culture can decline dramatically during a crisis if not managed
with sufficient, effective communications.
Complacency: Signals completely
overlooked
Crisis explained away: Belief that it will
disappear; no need for action
Some action taken but need for action
under estimated – Optimism “We are Ok”
self preservation and beginning of creative
accounting.
Inability to take action
1. Hidden Crisis
2. Crisis Denial
3. Disintegration of
Organization Begins
4. Organizational Collapse
Creative Accounting – How did company get so bad
so fast?
Copyright 2014. All Rights Reserved.
Time
Performance
Hidden
Crisis
Crisis
Denial
The
Reality
Gap
A
B
Reported
Actual
Source: Corporate Recovery: Managing Companies in Distress, by Stuart Slatter & David Lovett
Basic Requirements for Turnarounds
• Sometimes the dysfunction that precedes the start of a turnaround
can actually facilitate a turnaround. This comes about because
organizations have to “re-learn” what they know before they can
start to be “re-programmed”. For example, they have to:
– Lose confidence in their old leaders before they will listen to new
leaders
– Abandon their old objectives before they will adopt new ones
– Reject their perceptual filters before they will notice events they had
previously overlooked
– See that their old methods do not work before they will invest in and
adopt new methods
Copyright 2014. All Rights Reserved.
A crisis is frequently necessary before change can be achieved, since it is only then
that the necessary organizational “re-learning” can take place.
The One-Two Combo Punch
• Grind out the facts
– Debunk company and industry folklore with facts
• Acknowledge problems and develop new thinking to address change
GETTING STARTED:
– Prepare to meet management
– Obtain, review and summarize financial information
– Obtain, review management organization chart and business organization charts
– Conduct initial meeting with CEO/CFO
– Develop an understanding of the business
– Review financial issues – Do they understand the gravity of the situation?
– Conduct meetings with other team members – middle management
– Organize a tour of the facility
– Record observations and form an initial hypothesis
– Record initial views of management
Copyright 2014. All Rights Reserved.
Developing
Turnaround Strategies
Copyright 2014. All Rights Reserved.
Turnaround Process - Four Key Objectives
Copyright 2014. All Rights Reserved.
Successful turnarounds are based on addressing both strategic and operational issues and by doing so, creating
a new EBITDA engine. Only then can a new financial structure be put in place to match the new EBITDA engine.
4. Resolve Future Funding
2. Rebuild Stakeholder Support 1. Take Control of the Situation
3. Fix the Business
• Financial restructuring • Strategic focus
• Organizational change
• Critical process improvements
• Crisis stabilization
• Leadership
• Stakeholder management
Phases of the Turnaround Process
Four Key Objectives
Survival Phase Stability Phase Growth Phase Growth Phase Survival Phase Survival Phase Stability Phase Stability Phase Growth Phase
The Seven Essential Ingredients
Copyright 2014. All Rights Reserved.
To achieve the key objectives, there are seven essential ingredients.
Seven Key Ingredients Generic Turnaround Strategies
Crisis Stabilization
• Take Control
• Cash Management
• Working Capital Reduction
• Asset Reduction
• Short-term Financing
• First-step cost reduction
Leadership
• “Critical Mass” of New Thinking
• Potential Change of Senior Management
Stakeholder Support
• Communications
Strategic Focus
• Redefine Core Businesses
• Divestment and Asset Reduction
• Product-Market Refocusing
• Downsizing
• Outsourcing
• Investment
Organizational Change
• Structural Changes
• Key People Changes
• Improved Communications
• Building Commitment and Capabilities
• New Terms and Conditions of Employment
Critical Process Improvements
• Improved Information and Control Systems (“Management Accounting”)
• Improved Sales and Marketing
• Cost Reduction
• Quality Improvements
• Improved Responsiveness
Financial Restructuring
• Refinancing
• Asset Reduction
1) Crisis Stabilization
– Review EVERY disbursement for necessity
1) The process of developing a 13-week cash
projection is the best way to quickly
understand critical business issues and the
essence of a business.
2) To use as a “reality tool” to help management
break out of denial.
3) To understand cash flow of the business and
plan appropriately.
4) To quantify how much time to develop/effect
the turnaround (the “liquidity runway”).
– Why?
– The forecast allows you and management to
understand:
? Major Cash Sources & Uses
? Operational Structure
? Primary Assets
? Variable and fixed expenses
? Core vs. Non-Core divisions
– The forecast and analysis is crucial to help
understand the following:
? Is there an immediate cash crisis?
? Does the Company need to find alternative financing?
? Does the Company need to file for bankruptcy?
? What areas of the business use the most capital?
? Does the Company have working capital problems. If so, where?
– Once the forecast is finalized, it will be presented to management, lenders, and other stakeholders as
required and used to Run the Business.
Take Control of Check Book
Develop a 13-Week Cash Flow Projection
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Mechanics of a 13-Week Cash
Flow Projection
• Granular detail, “Direct” cash flow
• Not GAAP cash flow statement (Indirect)
• Not an “Excel model” but a comprehensive “process” that
must be used over an extended period of time
– Must develop primary drivers of business and how to include in
model
– Find historical data in accounting systems
– Why . . . Why . . . Why . . .
– Must be able to cost effectively pull actual results on a timely
basis from books for use in weekly variance analysis
– Talk to management and staff not just at the top, but also
middle levels and “DOERS”
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Building the Forecast
• Talk with key management and staff – Get out in the Company
– Treasurer – Accounts Receivable manager
– Controller – Head of Sales
– CFO – Head of Purchasing
? Ask general questions and let them talk about their business
? Connect with management and staff
? Explain the goal of generating a bottoms up forecast in a relatively short time frame
• Historical Financials
– Historical financial information will be the anchor and ultimate “vet” of your forecast
– Try to obtain access to the following electronic files for at least six months and up to two years if
possible:
? Monthly financial statements (income statement, balance sheet and cash flow)
? Sales by division / segment / operation
? Accounts payable check runs
? Payroll and other human resources payments
? Key vendor payments
? Capital expenditures
– Analyze the financials to understand where and when the cash was disbursed
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Building the Forecast (cont.)
• Company Cash Flow Forecast
– Find out if the Company has a treasury forecast or any other tools they use to manage cash flow
– Obtain old forecasts and compare these to actual results
– Identify their view of major sources and uses
• Other Treasury Tools (if the Company doesn’t have a cash flow forecast)
– Historical bank balances by division or segment
– Cash/bank reconciliations
– Monthly reporting packages that illustrate cash sources and uses
• Seasonality and Working Capital Requirements\One Time Cash Needs
– If seasonality of the cash flow is not properly forecast, timing issues may occur and the Company
may be negatively impacted by working capital requirements on a weekly and monthly basis
– Seasonality effects both receipts and disbursements of the Company, including:
? Paying vendors, Purchasing raw materials, Collecting receivables
? Vendor terms may change over the course of a year (depending on the industry)
? Certain companies may require an “inventory build” heading into their busier seasons
• Use historical financials, seasonality, working capital requirements and one time cash needs
to ensure that the 13-week cash flow forecast correctly captures cash sources and uses both
short and long-term
• DETAIL . . . DETAIL . . . DETAIL
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Example 13-Week Forecast
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Example 13-Week Forecast
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Working Capital Reduction
• Accounts Payable
– Detailed review of vendor terms
– Create a “vendor map” detailing all terms and average weekly spend
– Focus on opportunities to stretch existing terms and reduce/extend discounts
– Review disbursement/check-run procedures and frequency of check runs
– Develop cash management committee
– Create formal process to review all pending checks
– Focus on extending payments without disrupting business
• Accounts Receivable
– Perform detailed review of outstanding AR and historical collections activity
– Search for opportunities to tighten terms and/or extend discounts to reduce Days Sales
Outstanding (“DSO”)
– Create a “customer map” detailing all terms and average weekly sales
– Understand current Collections’ protocol
– Focus on motivating AR personnel to collect faster (installation of incentive plans,
“spiffs”, etc.)
– Establish weekly AR meeting to discuss collection plans
– Create target list for each collector and set specific weekly collection goals
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Working Capital Reduction
• Inventory
– Perform detailed review of current inventory on-hand
– Chart inventory turns by product type (high-level SKU analysis)
– Search for opportunities to reduce slow moving inventory
– Review possibility of removing certain inventory and replacing with faster turning
inventory
– Review historical inventory trends
– Determine which months/weeks turn inventory fastest - and why
– Shift purchasing patterns to better mirror business cycles
– Examine purchasing contracts
– Determine if opportunities exist to return slow-moving inventory
– Focus on opportunities to reduce inventory costs (potentially via commitments to buy
future amounts and or via exclusive contracts)
– Create Purchase Order (“PO”) review process
– Incorporate purchase order review into AP cash management process
– Require PO’s over a certain threshold to be approved by senior management (e.g. the
CFO/Controller)
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Asset Reduction and Short-
Term Financing
• Asset Reduction
– Capex and Discretionary Spending
• Stop all Capex pending immediate necessity review
• Stop all obvious discretionary spending, i.e. “anything new”
– Sale of Non-Core Assets
• Cash value of insurance polices
• Real Estate
• Excess equipment
• Business unit/division
• Short-Term Financing
– Meet with lenders to arrange short term agreement on liquidity
availability
– Discuss terms relief with vendors
Copyright 2014. All Rights Reserved.
2) Leadership
• Begin assessing the CEO, senior management, and middle
managers
– Obstructive members of management who cannot get past
denial must be dealt with.
• Owner-CEO’s must be “led out of darkness and shown the light of
reality”
– Other senior management must be separated into those who
understand reality and are not in denial and those that persist
with the status quo
– CFO/Controller function is critical and often must be replaced
• Action must be taken to build the critical mass of new
thinking in the Company to effect a turnaround
Copyright 2014. All Rights Reserved.
3) Stakeholder Support
• Appropriate Communication
– Lenders
– Vendors
– Customers
– Employees
• Must Rebuild Credibility
– Develop message
– Communicate . . . Communicate . . . Communicate . . .
Copyright 2014. All Rights Reserved.
4) Strategic Focus – Business Assessment
• Where are we making money, where are we losing money
– Plant by plant analysis
– Customer by customer analysis
– Product line by product line analysis
– Product/SKU by product/SKU analysis
• Can we trust the cost accounting
– Are costs captured accurately
– Are indirect costs allocated accurately (Not on a GAAP basis) but on activity driven basis
• What is “Core” business
• What is our currently implemented “manufacturing strategy” (plant setup) best suited to produce in the
short run. Sell what you can make well – not anything a salesman thinks he can sell
– Many products/SKU’s added over time but nothing discontinued
– 80/20 rule on products versus profit
• Develop action plan to focus business on products, customers, and processes that are profitable
– Understand that there are two limited resources: (1) Money, (2) Management time / Talent
– Focusing money and talent on profitable business rather than wasting it on “continuing to baby sit problems”
produces excellent results.
Copyright 2014. All Rights Reserved.
5) Organizational Change
• Revise structure to facilitate accountability and
responsibility
• Determine who is both capable and willing to get the
job done under new thinking
• Does the management organization promote
“Decision Making” or “Finger Pointing”
• Establish efficient compensation/reward system
Copyright 2014. All Rights Reserved.
6) Critical Process Improvements
• Management Reporting/KPI’s
– Financial reports that give appropriate and accurate
information
– Timely reports
– “Period in period” reporting
– Cost accounting improvement
– Pricing/Bidding procedure improvement/corrections
– Strict process adherence
– Operational discipline – NO SHORT CUTS!
Copyright 2014. All Rights Reserved.
Characteristics of Successful Turnaround Strategies
• Some new management is almost always necessary
• Successful strategies are more often characterized by improved financial control systems than are
failed situations
• Failed situations often take steps to improve control systems but fail to use the resulting data to
implement tight financial control
• Nearly all successful strategies involve focusing resources on selected business units and selected
product-market segments
• Cost reduction strategies are frequently used as part of a profit improvement strategy, but are used
even more frequently by firms that fail to improve
• Cash generation, particularly via divestment, is a characteristic of most successful strategies
• Improved marketing effort is common to both successful and unsuccessful strategies, but successful
firms tend to couple this with more fundamental product-market reorientation
• The most successful strategies include significant organizational change in terms of both
organization structure and processes
Two Key Messages – Don’t “Chip Away” – Blow It Out!
1) Firms employing successful profit improvement strategies use almost twice as many profit
improvement strategies as firms employing unsuccessful strategies
2) “Ruthless” follow-through is required: Need for more rather than less action
Copyright 2014. All Rights Reserved.
Characteristics of Successful Turnaround Strategies
• Early and decisive action will lay the foundation for a successful
turnaround. Weathering a Corporate Storm Depends on an
Organization's Ability to:
– Face problems early
– Seek professional and objective help to stabilize core operations and
restore credibility
– Gather, examine, and diagnose the facts at the root of complex
operational and/or financial problems
– Make difficult decisions
– Plan a clear and executable path forward
– Forge consensus among polarized factions of internal and external
constituencies
– Lead people into the future with a sense of vision, realism, and
commitment
Copyright 2014. All Rights Reserved.
Role of “New Thinking”
“The significant problems (and opportunities) we face cannot be solved at
the same level of thinking we’re at when they were created.”
“You have to look at changing the way you think, then the way you act.”
-Einstein
A critical mass of new thinking is required within management ranks to lead change
throughout the organization.
Copyright 2014. All Rights Reserved.
Welch’s Six Rules
1) Face reality as it is, not as it was or as you wish it were
2) Be candid with everyone!
3) Don’t manage, lead!
4) If you don’t have a competitive advantage, don’t compete
5) Change before you have to!
6) Control your destiny or someone else will
Copyright 2014. All Rights Reserved.
doc_449472617.pdf
Keys to operational and financial restructuring of smaller companies Alvarez & Marsal and McKenna Long & Aldridge, LLP.
Keys to operational and financial
restructuring of smaller companies
Alvarez & Marsal and McKenna Long & Aldridge, LLP
Moderator:
Gary Marsh – McKenna Long & Aldridge, LLP - Partner
Panelists:
Bill Runge – A&M- Managing Director, Head of South Region
Lawrence Hirsh – A&M- Managing Director, Atlanta
John Makuch – A&M- Managing Director, Atlanta
The Situation
Copyright 2014. All Rights Reserved.
Paths of a Turnaround or Restructuring
Copyright 2014. All Rights Reserved.
Time
Non-Crisis
Crisis
Sustainable
Recovery
Mere Survival
Short-Term
Survival
Failed Turnaround
Insolvency
Financial Position
Turnaround
strategies adopted
The transition to a Crisis can take weeks, months or years
depending on many factors, such as:
– the industry
– the degree of indebtedness
– the availability of capital
– the nature of the causes of poor performance
Source: Corporate Recovery: Managing Companies in Distress, by Stuart Slatter & David Lovett
Causes of Distress
Copyright 2014. All Rights Reserved.
External Internal
Capital Structure / Leverage
Changes in Market
Demand
– Housing market
– Coal industry
Competition
– New competition
– Change in relative
competitive position
– Brick and mortar retail vs.
online
Change in Costs
– Adverse change in
commodity prices
– Disconnect with customer
contracts
Poor Management
– Not necessarily
incompetence but poor
team dynamic
Inadequate Financial
Control
– Failure to identify declining
performance and take
action
High Cost Structure
– Fixed costs may have
increased as a result of an
attempted growth push
Loss of Talent
– Or mis-alignment of
resources due to
management changes
Poor Marketing
– Lack of focus on selling and
marketing efforts
Big Projects /
Acquisitions
– Poor integration
– Distraction from core
competencies
– Drain on financial
resources
Crisis Indicators
• Turnover in key positions
• Loss of credibility with stakeholders
• Lender tightening borrowing lines
• Vendors requiring COD/CIA
• A/P increasing
• A/R aging
• Ineffective forecasting
• Lack of coordination between sales and operating departments
• Production problems
• Deferment of major repairs
• Forecasts which depend on unrealistic home runs
Copyright 2014. All Rights Reserved.
The #1 indicator of a crisis or that a crisis may occur is the inability of management to
fully acknowledge its problems and to articulate a clear path to resolution.
Impact of a Crisis on the Organization
Copyright 2014. All Rights Reserved.
A company’s culture can decline dramatically during a crisis if not managed
with sufficient, effective communications.
Complacency: Signals completely
overlooked
Crisis explained away: Belief that it will
disappear; no need for action
Some action taken but need for action
under estimated – Optimism “We are Ok”
self preservation and beginning of creative
accounting.
Inability to take action
1. Hidden Crisis
2. Crisis Denial
3. Disintegration of
Organization Begins
4. Organizational Collapse
Creative Accounting – How did company get so bad
so fast?
Copyright 2014. All Rights Reserved.
Time
Performance
Hidden
Crisis
Crisis
Denial
The
Reality
Gap
A
B
Reported
Actual
Source: Corporate Recovery: Managing Companies in Distress, by Stuart Slatter & David Lovett
Basic Requirements for Turnarounds
• Sometimes the dysfunction that precedes the start of a turnaround
can actually facilitate a turnaround. This comes about because
organizations have to “re-learn” what they know before they can
start to be “re-programmed”. For example, they have to:
– Lose confidence in their old leaders before they will listen to new
leaders
– Abandon their old objectives before they will adopt new ones
– Reject their perceptual filters before they will notice events they had
previously overlooked
– See that their old methods do not work before they will invest in and
adopt new methods
Copyright 2014. All Rights Reserved.
A crisis is frequently necessary before change can be achieved, since it is only then
that the necessary organizational “re-learning” can take place.
The One-Two Combo Punch
• Grind out the facts
– Debunk company and industry folklore with facts
• Acknowledge problems and develop new thinking to address change
GETTING STARTED:
– Prepare to meet management
– Obtain, review and summarize financial information
– Obtain, review management organization chart and business organization charts
– Conduct initial meeting with CEO/CFO
– Develop an understanding of the business
– Review financial issues – Do they understand the gravity of the situation?
– Conduct meetings with other team members – middle management
– Organize a tour of the facility
– Record observations and form an initial hypothesis
– Record initial views of management
Copyright 2014. All Rights Reserved.
Developing
Turnaround Strategies
Copyright 2014. All Rights Reserved.
Turnaround Process - Four Key Objectives
Copyright 2014. All Rights Reserved.
Successful turnarounds are based on addressing both strategic and operational issues and by doing so, creating
a new EBITDA engine. Only then can a new financial structure be put in place to match the new EBITDA engine.
4. Resolve Future Funding
2. Rebuild Stakeholder Support 1. Take Control of the Situation
3. Fix the Business
• Financial restructuring • Strategic focus
• Organizational change
• Critical process improvements
• Crisis stabilization
• Leadership
• Stakeholder management
Phases of the Turnaround Process
Four Key Objectives
Survival Phase Stability Phase Growth Phase Growth Phase Survival Phase Survival Phase Stability Phase Stability Phase Growth Phase
The Seven Essential Ingredients
Copyright 2014. All Rights Reserved.
To achieve the key objectives, there are seven essential ingredients.
Seven Key Ingredients Generic Turnaround Strategies
Crisis Stabilization
• Take Control
• Cash Management
• Working Capital Reduction
• Asset Reduction
• Short-term Financing
• First-step cost reduction
Leadership
• “Critical Mass” of New Thinking
• Potential Change of Senior Management
Stakeholder Support
• Communications
Strategic Focus
• Redefine Core Businesses
• Divestment and Asset Reduction
• Product-Market Refocusing
• Downsizing
• Outsourcing
• Investment
Organizational Change
• Structural Changes
• Key People Changes
• Improved Communications
• Building Commitment and Capabilities
• New Terms and Conditions of Employment
Critical Process Improvements
• Improved Information and Control Systems (“Management Accounting”)
• Improved Sales and Marketing
• Cost Reduction
• Quality Improvements
• Improved Responsiveness
Financial Restructuring
• Refinancing
• Asset Reduction
1) Crisis Stabilization
– Review EVERY disbursement for necessity
1) The process of developing a 13-week cash
projection is the best way to quickly
understand critical business issues and the
essence of a business.
2) To use as a “reality tool” to help management
break out of denial.
3) To understand cash flow of the business and
plan appropriately.
4) To quantify how much time to develop/effect
the turnaround (the “liquidity runway”).
– Why?
– The forecast allows you and management to
understand:
? Major Cash Sources & Uses
? Operational Structure
? Primary Assets
? Variable and fixed expenses
? Core vs. Non-Core divisions
– The forecast and analysis is crucial to help
understand the following:
? Is there an immediate cash crisis?
? Does the Company need to find alternative financing?
? Does the Company need to file for bankruptcy?
? What areas of the business use the most capital?
? Does the Company have working capital problems. If so, where?
– Once the forecast is finalized, it will be presented to management, lenders, and other stakeholders as
required and used to Run the Business.
Take Control of Check Book
Develop a 13-Week Cash Flow Projection
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Mechanics of a 13-Week Cash
Flow Projection
• Granular detail, “Direct” cash flow
• Not GAAP cash flow statement (Indirect)
• Not an “Excel model” but a comprehensive “process” that
must be used over an extended period of time
– Must develop primary drivers of business and how to include in
model
– Find historical data in accounting systems
– Why . . . Why . . . Why . . .
– Must be able to cost effectively pull actual results on a timely
basis from books for use in weekly variance analysis
– Talk to management and staff not just at the top, but also
middle levels and “DOERS”
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Building the Forecast
• Talk with key management and staff – Get out in the Company
– Treasurer – Accounts Receivable manager
– Controller – Head of Sales
– CFO – Head of Purchasing
? Ask general questions and let them talk about their business
? Connect with management and staff
? Explain the goal of generating a bottoms up forecast in a relatively short time frame
• Historical Financials
– Historical financial information will be the anchor and ultimate “vet” of your forecast
– Try to obtain access to the following electronic files for at least six months and up to two years if
possible:
? Monthly financial statements (income statement, balance sheet and cash flow)
? Sales by division / segment / operation
? Accounts payable check runs
? Payroll and other human resources payments
? Key vendor payments
? Capital expenditures
– Analyze the financials to understand where and when the cash was disbursed
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Building the Forecast (cont.)
• Company Cash Flow Forecast
– Find out if the Company has a treasury forecast or any other tools they use to manage cash flow
– Obtain old forecasts and compare these to actual results
– Identify their view of major sources and uses
• Other Treasury Tools (if the Company doesn’t have a cash flow forecast)
– Historical bank balances by division or segment
– Cash/bank reconciliations
– Monthly reporting packages that illustrate cash sources and uses
• Seasonality and Working Capital Requirements\One Time Cash Needs
– If seasonality of the cash flow is not properly forecast, timing issues may occur and the Company
may be negatively impacted by working capital requirements on a weekly and monthly basis
– Seasonality effects both receipts and disbursements of the Company, including:
? Paying vendors, Purchasing raw materials, Collecting receivables
? Vendor terms may change over the course of a year (depending on the industry)
? Certain companies may require an “inventory build” heading into their busier seasons
• Use historical financials, seasonality, working capital requirements and one time cash needs
to ensure that the 13-week cash flow forecast correctly captures cash sources and uses both
short and long-term
• DETAIL . . . DETAIL . . . DETAIL
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Example 13-Week Forecast
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Example 13-Week Forecast
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Working Capital Reduction
• Accounts Payable
– Detailed review of vendor terms
– Create a “vendor map” detailing all terms and average weekly spend
– Focus on opportunities to stretch existing terms and reduce/extend discounts
– Review disbursement/check-run procedures and frequency of check runs
– Develop cash management committee
– Create formal process to review all pending checks
– Focus on extending payments without disrupting business
• Accounts Receivable
– Perform detailed review of outstanding AR and historical collections activity
– Search for opportunities to tighten terms and/or extend discounts to reduce Days Sales
Outstanding (“DSO”)
– Create a “customer map” detailing all terms and average weekly sales
– Understand current Collections’ protocol
– Focus on motivating AR personnel to collect faster (installation of incentive plans,
“spiffs”, etc.)
– Establish weekly AR meeting to discuss collection plans
– Create target list for each collector and set specific weekly collection goals
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Working Capital Reduction
• Inventory
– Perform detailed review of current inventory on-hand
– Chart inventory turns by product type (high-level SKU analysis)
– Search for opportunities to reduce slow moving inventory
– Review possibility of removing certain inventory and replacing with faster turning
inventory
– Review historical inventory trends
– Determine which months/weeks turn inventory fastest - and why
– Shift purchasing patterns to better mirror business cycles
– Examine purchasing contracts
– Determine if opportunities exist to return slow-moving inventory
– Focus on opportunities to reduce inventory costs (potentially via commitments to buy
future amounts and or via exclusive contracts)
– Create Purchase Order (“PO”) review process
– Incorporate purchase order review into AP cash management process
– Require PO’s over a certain threshold to be approved by senior management (e.g. the
CFO/Controller)
Copyright 2014. All Rights Reserved.
1) Crisis Stabilization – Asset Reduction and Short-
Term Financing
• Asset Reduction
– Capex and Discretionary Spending
• Stop all Capex pending immediate necessity review
• Stop all obvious discretionary spending, i.e. “anything new”
– Sale of Non-Core Assets
• Cash value of insurance polices
• Real Estate
• Excess equipment
• Business unit/division
• Short-Term Financing
– Meet with lenders to arrange short term agreement on liquidity
availability
– Discuss terms relief with vendors
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2) Leadership
• Begin assessing the CEO, senior management, and middle
managers
– Obstructive members of management who cannot get past
denial must be dealt with.
• Owner-CEO’s must be “led out of darkness and shown the light of
reality”
– Other senior management must be separated into those who
understand reality and are not in denial and those that persist
with the status quo
– CFO/Controller function is critical and often must be replaced
• Action must be taken to build the critical mass of new
thinking in the Company to effect a turnaround
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3) Stakeholder Support
• Appropriate Communication
– Lenders
– Vendors
– Customers
– Employees
• Must Rebuild Credibility
– Develop message
– Communicate . . . Communicate . . . Communicate . . .
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4) Strategic Focus – Business Assessment
• Where are we making money, where are we losing money
– Plant by plant analysis
– Customer by customer analysis
– Product line by product line analysis
– Product/SKU by product/SKU analysis
• Can we trust the cost accounting
– Are costs captured accurately
– Are indirect costs allocated accurately (Not on a GAAP basis) but on activity driven basis
• What is “Core” business
• What is our currently implemented “manufacturing strategy” (plant setup) best suited to produce in the
short run. Sell what you can make well – not anything a salesman thinks he can sell
– Many products/SKU’s added over time but nothing discontinued
– 80/20 rule on products versus profit
• Develop action plan to focus business on products, customers, and processes that are profitable
– Understand that there are two limited resources: (1) Money, (2) Management time / Talent
– Focusing money and talent on profitable business rather than wasting it on “continuing to baby sit problems”
produces excellent results.
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5) Organizational Change
• Revise structure to facilitate accountability and
responsibility
• Determine who is both capable and willing to get the
job done under new thinking
• Does the management organization promote
“Decision Making” or “Finger Pointing”
• Establish efficient compensation/reward system
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6) Critical Process Improvements
• Management Reporting/KPI’s
– Financial reports that give appropriate and accurate
information
– Timely reports
– “Period in period” reporting
– Cost accounting improvement
– Pricing/Bidding procedure improvement/corrections
– Strict process adherence
– Operational discipline – NO SHORT CUTS!
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Characteristics of Successful Turnaround Strategies
• Some new management is almost always necessary
• Successful strategies are more often characterized by improved financial control systems than are
failed situations
• Failed situations often take steps to improve control systems but fail to use the resulting data to
implement tight financial control
• Nearly all successful strategies involve focusing resources on selected business units and selected
product-market segments
• Cost reduction strategies are frequently used as part of a profit improvement strategy, but are used
even more frequently by firms that fail to improve
• Cash generation, particularly via divestment, is a characteristic of most successful strategies
• Improved marketing effort is common to both successful and unsuccessful strategies, but successful
firms tend to couple this with more fundamental product-market reorientation
• The most successful strategies include significant organizational change in terms of both
organization structure and processes
Two Key Messages – Don’t “Chip Away” – Blow It Out!
1) Firms employing successful profit improvement strategies use almost twice as many profit
improvement strategies as firms employing unsuccessful strategies
2) “Ruthless” follow-through is required: Need for more rather than less action
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Characteristics of Successful Turnaround Strategies
• Early and decisive action will lay the foundation for a successful
turnaround. Weathering a Corporate Storm Depends on an
Organization's Ability to:
– Face problems early
– Seek professional and objective help to stabilize core operations and
restore credibility
– Gather, examine, and diagnose the facts at the root of complex
operational and/or financial problems
– Make difficult decisions
– Plan a clear and executable path forward
– Forge consensus among polarized factions of internal and external
constituencies
– Lead people into the future with a sense of vision, realism, and
commitment
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Role of “New Thinking”
“The significant problems (and opportunities) we face cannot be solved at
the same level of thinking we’re at when they were created.”
“You have to look at changing the way you think, then the way you act.”
-Einstein
A critical mass of new thinking is required within management ranks to lead change
throughout the organization.
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Welch’s Six Rules
1) Face reality as it is, not as it was or as you wish it were
2) Be candid with everyone!
3) Don’t manage, lead!
4) If you don’t have a competitive advantage, don’t compete
5) Change before you have to!
6) Control your destiny or someone else will
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