Debtors are well advised to demonstrate intent and goodwill by embarking on their own internal housekeeping before approaching their creditors, who cannot be expected to make concessions without seeing commensurate intent on the side of the debtor. (Remember the reaction in 2008/9 when the Detroit Auto Leadership jetted in on Corporate Lear Jets, to plead government assistance - what's wrong with that picture??) Start off with your internal austerity plan.
A new management philosophy must be adopted, focused on survival, for which the guiding principles must be:
Financial prudence and austerity might not be enough, you might have to cut to the bone, never mind removing fat! This is why you we couple this austerity plan to a debt workout, which will allow you to look at options available in typical debt refinancing or financial restructuring. These discussions are much easier if you assure your creditors that your internal austerity actions are being implemented and showing results. Either way you will need some room to maneuver and this requires you remain in a positive cash flow, come what may! Adopt the behaviour of our grandmother's generation!
Live and die by a new rule - maintain a positive cash flow, and do not use credit.
Recognise that this crisis is a time of opportunity for new leadership to emerge on your business, and indeed for your own leadership to leave its mark and create a legacy. It is not too late for great things to happen.
Persons inside and outside your business will look to you for leadership. Step up and lead by example, manage by walking around and talking with people, know your numbers and business processes, and be solution oriented.
Prepare a cash flow budget for 3 months, which is the maximum time horizon you should allow for your diagnosis and remediation plan to be done. You must create enough cash to move through this phase.
There could be a number of reasons why your business is in trouble, but everything distills to one of two reasons:
An over simplification of your business? Perhaps, but all business failures distill down to single sentences your children can utter! The good thing is once you get to the root cause, and not the symptom, the problems can be solved. However, sometimes the problems in your business are insidious, but here are some very useful tools for you to quickly get to the problems, and we'll get there by you answering these simple questions
But you don't know the answers to these basic questions do you? So let's keep to the basics for the time being.
You can quickly isolate the causes through financial analysis. Look at your company's performance ratios for the past three to five years. (Park the thought why this has not been done previously? )
Do not get distracted by what other companies are doing, even your competitors. The chances re that if you were unaware of what was happening in your own business, looking elsewhere will do you no good for the time being (we'll look at these later, just not now!)
If you don't know how to do this refer to this tutorial Understanding Value Destruction in your business
Create your contribution data and understand the value generators by
Now make plans to remove the big value destroyers and remove all associated costs with them!
The tool you should use is the Income Statement, and we will break this down from the summary financial amounts to the operational drivers, if you do this properly you'll probably ditch all your other business reporting.
If you don't know how to do this refer to this tutorial Deconstructing your Income Statement This step is essential in your diagnosis and essential in assigning accountability to key parts of your business
We don't want to impose too much change on your business, but if the review of your value destroyers and aligning costs through austerity are not enough, then you will have to review your core business.
Review your business value chain from Product Developmental and Marketing, through Distribution to Operations and Business Support functions, now answer candidly, what are your core business functions?
You need to double check whatever change you plan with the cash required to cycle through your business
If you are unsure of what we mean by Cash Conversion Cycle refer to this tutorial. Your Cash Conversion Cycle - everything you need to know.
Write a simple turnaround plan to get through the next year and convince your creditors to stick with you. State your objectives in measurable terms. Describe your core business, sales plan, staff reductions and cost saving actions. Include a cash budget and a set of monthly financial projections. Prove that you can stay in business while you turn things around.
Be honest in your assessment of how you got into this situation and how you intend to get out of it. This will help restore your credibility. You will need this to obtain concessions from your creditors.
You have a matrix of creditors - the first cut is those that want you to stay in business, i.e. those creditors that supply your production and want you to remain as a buyer from them, then have a view of those who are not essential to your production
Where do banks fall? well that depends, some of them are great and want you to survive others are less honorable. You can always bank elsewhere, but if you owe a bank cash, tread carefully. In general, if you don't spring surprises on them and are open you'll be pleasantly surprised. But you be the judge of your relationship with them!
Now meet with different creditors and sell them on your turnaround plan. Be factual and positive. Share the detail with them! Show them how they will be repaid from your successful turnaround and make the comparison to an insolvency outcome. Most will go along with you. Try your best with Type B creditors, but don't let them stall your turnaround!
Do not fail to execute and in your diagnosis pay good thought to whether the failure to execute within the business was a contributing factor in your current crisis - it normally is!
We have supplied useful tactics on how to reliably execute, they are simple and powerful - use these! For a set of tools refer to this link The real differentiator - reliable execution.
If you own the business, you won't get much for a broken organisation - to extract value from a sale you will have to fix certain things, if you are lucky you might be able to negotiate a merger, but this just exchanges one set of problems for another......
If you like what you do and can you see yourself happily doing it for another three to five years, you should keep your company and grow it. You now have a profitable company and staying on course should be easier this time around. You certainly know what to avoid and what mistakes you must not repeat.
If you are tired, you probably should sell this company and do something else. There is a reason this crisis arose, and most will place the blame on the shoulders of the current owner and leadership. If you have rescued your business, then who cares, you did what you needed to do and we all make mistakes. Move on. The good news is your company is now worth something, whereas before you turned it around, it was worth little or nothing. Manage it well while you have it on the market, but don't have it on the market for too long - do your own selling before using brokers.
