When a business is in distress, it’s imperative to stabilize the situation before it’s too late. Paul Denton suggests performing a detailed triage on the ailing company—enabling leadership to easily identify and prioritize actions to gain back financial control and stabilize the business.
How do you stop the bleeding once it’s started? Most people tend to panic at the first sight of a crisis—making a bad situation even worse. Human survival psychologist, John Leach explains, “around 75% of people are so bewildered by the situation that they are unable to think clearly or plot their escape. They become mentally paralyzed.”
In the world of distressed businesses, the same psychology rings true. Succumbing to the pressure of a financial crunch happens all too often but, when a business is in distress, it’s imperative to stabilize and gain control of the situation—enabling the executive team to buy time to implement a turnaround plan.
That said, by performing a detailed a four-step “triage” on an ailing company—leadership can easily identify and prioritize actions to gain back financial control and stabilize the business:
- step one: ensure that enough cash is available to fund short-term needs and to fund the restructuring process
- step two: confirm management buy-in and set up a core team that is committed to the success of the project
- step three: verify that assets are safeguarded and preserved to maximize resources available for turnaround
- step four: understand the key financial and operating issues to rally short-term support from stakeholders
Step One: Establish a Cash-conservation Program
Whether you are sitting in the driver’s seat as a beleaguered CEO or you’re a frustrated board member who has hired an interim executive to stop the bleeding, the key to the next 60 days is prioritization.
Below are the suggested triage actions, but the order will depend on many internal and external criteria—such as the patience of your creditors and investors, the capabilities of the rest of the management team, sales projection status, burn rate, and the list goes on.
Every situation is different and there isn’t a magic bullet. However, if you are unsure of where to begin, always remember that cash is king—begin by setting up a cash-conservation program.
- obtain or prepare detailed rolling short-term weekly cash flow projections and lender borrowing base calculation (minimum of 13-weeks) to understand the size of any short-term liquidity issues (the “liquidity gap” – availability per operating lender line of credit vs. funding requirements)
- conduct a high-level review to:
- confirm current opening financial position and an updated snapshot of accounts receivables (AR), inventory, accounts payable etc. (e.g., ensure payable listings are complete, rebook outstanding held cheques, identify potential priority claims e.g. HST owing)
- assess accuracy, availability, and appropriateness of management reporting information
- examine opportunities to expedite billings and AR collections
- examine opportunities for improving inventory turns including monetising slow moving inventory
- assess opportunities for postponement or deferral of payments with major creditors/suppliers
- review other non-cash working capital items to determine the potential for accelerating conversion to cash
- conduct a detailed review of operating expenses and capital spending to identify expenditures that can be deferred or eliminated without compromising the business or “cutting into muscle”
- assess the need to immediately centralize control of expense approval & cheque issuance
- find redundant assets that can be sold
- identify any excess leverage capacity to support added short-term borrowings
- develop documentation and system changes necessary to effect short-term cash conservation measures
- complete high-level financial diagnostic—address issues relating to strategy, operations, management, support infrastructure, and financial issues. This typically leads to the identification of “quick hit” opportunities with short implementation timeframe; which produces immediate cash savings. The exercise can also be useful from a number of perspectives; key management team members are engaged to identify these opportunities; it can then provide immediate traction and in turn help galvanize the management team.
Step Two: Establish the “Go-forward” Management Team
As we all know, ineffective management can cripple a company—or outright paralyze it. If a company is in distress, strong leadership is required to assess, mobilize, motivate, and move forward with talented and tough individuals who are committed to righting the ship.
To build a qualified and committed go-forward management team, companies should look to:
- obtain an organization chart and confirm current roles, responsibilities, and gaps
- conduct executive, management, and Board interviews to determine management strengths and weaknesses
- identify key employees with special skills and knowledge
- remain objective, fair but firm in human resource decisions
- review management contracts terms and conditions vis-à-vis rightsizing
- assess Director and Officer exposure and extent of insurance coverage
- form go-forward management team, including:
- changes to organization structure
- develop employee retention and severance strategies
- generate terms of reference for a potential chief restructuring officer, if deemed appropriate
Too often in distressed situations, management focus is undermined by the need to fight fires while trying to run the business. Alignment and focus on priorities is key to navigating these situations.
Again, in the first two steps, it’s crucial that a company conserves as much cash as possible—for short and long-term needs. Once the cash-conversation program has been established, finding a competent and committed team is the next major task, before moving on to steps three and four.
In the next article, we will discuss the importance of verifying and safeguarding assets, along with the value of understanding the key financial and operating issues to rally short-term support from various stakeholders.
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Paul Denton is a Managing Director with the Restructuring practice of Farber. His practice focuses on providing restructuring and advisory services to corporations, lenders, and under-performing companies. Paul can be reached at 416.496.3773 and email@example.com.
Hylton Levy is a Partner with the Restructuring practice of Farber. His practice focuses on corporate restructuring and insolvency solutions, distressed financial advisory services and corporate consulting advisory services. Hylton can be reached at 416.496.3070 and firstname.lastname@example.org.