Erich Stolz

Building on a very successful International Management career in several corporations, Erich has concentrated on helping companies to provide the foundation to grow, turning around or restructure.  Read more...

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Saturday
Nov022013

Seven Steps To Improving Cash Flow And Profitability In A  Turnaround

Seven Steps To Improving Cash Flow And Profitability In A Turnaround

Today's businesses are operating in a tighter capital environment, one in which investors no longer have the appetite—nor the ability—to fund several years worth of operating losses.  Some companies have invested in organizations and infrastructure anticipating market demands that have not yet materialized; others have experienced explosive growth beyond their ability to manage profitably; while still others are operating with inadequate financial and operational controls.  With this as backdrop, many companies are finding it necessary to radically change direction and strategy to improve profitability—often resorting to layoffs alone, when much more is needed.  What follows are seven key actions for successfully changing a company's direction and improving its cash flows.

 1. Control Cash

Often, expenditures that remain in the pipeline from earlier times, when capital was more plentiful and growth projections more liberal, present an outstanding opportunity to save cash.  And while such attention to disbursements may slow the accounts payable process, gaining a quick understanding of the business and its cash flows is vital and worth a temporarily lengthier accounts payable cycle. 

In one turnaround engagement, a daily expenditures meeting was held with the department vice presidents, where expenses and capital outlays were approved.  The first 30 days were quite intense, with requests coming in for additional expenditures on cancelled projects.  Well-intentioned managers believed the spending was necessary to wind up the projects, and the meetings provided a forum for discussing necessities, given the company's new realities.

Those expenditures that were consistent with the company's long- and short-term needs were approved.  Over time, the need for meetings decreased as managers took up the cause and actively sought opportunities to save cash.  Through the executives' efforts, the company reduced monthly operating expenses 46 percent over a one-year period.

 2. Evaluate Accounting And Financial Reporting Systems

The turnaround team needs to determine whether the accounting and reporting system produces the necessary data to produce management reports needed to run the business, and if it accurately captures all the transactions entered into by the company and lists all of its assets and liabilities.  Often, the existing software is adequate but the system is not configured to provide the needed data.  In those cases, configuring the software can be quickly accomplished.

In one turnaround engagement, future purchase commitments were not being tracked.  A commitment and contingency report was prepared and circulated among the company's top 10 managers to ensure that all such commitments were reported.  Senior management then used the completed report as a checklist to re-negotiate the terms of the agreements that gave rise to those contingencies.

3. Focus On Strategic Solutions

The purpose of such a review is to articulate a new strategy whereby the company will grow revenues and be cash flow positive.  Two key review ingredients include: 1) participation from the organization's chief sales, marketing, technical, human re-sources and finance managers; and 2) the new or revised strategy has to be actionable using existing headcounts and capital resources.  The team has to resist strategies that require significant new inflows of capital.  In the midst of a turnaround, new debt or equity inflows may not be available to the company.

Management may conclude that the best way to make the company cash flow positive is to merge it with a complimentary business.  Once that decision is reached and approved by the board of directors, it must be pursued immediately.

In a turnaround engagement, a strategic review was completed within 60 days, and new products were launched and new markets opened within 120 days.  Such actions resulted from the strategic review findings, showing that a portion of the company's revenue-producing assets were underutilized and there were not associated product offerings in the pipeline.  The revenue growth generated by the new products and markets later became important evidence to potential investors that the company was growing in an environment where competitors were experiencing decreasing revenues.

4. Know The Size Of The Market

The turnaround team needs to carefully gauge the existing demand for the products and services being offered.  Two questions that must be answered by senior management include: "What is the size of the market?" and "What share of the market does the company service?" A follow-on question is, "What additional market share will be gained and how?" Correct decisions for allocating capital and personnel resources can only be made knowing the size of the market, the share of the market the company currently services and how much of the market it can capture.

The turnaround team needs to quickly quantify the company's market size and identify its market share to determine what products will drive revenue growth.  Even though a company may divest unprofitable products, subsidiaries or divisions, it needs to show growth and the potential for further sales growth in its core products.  Such growth will send a message to vendors, creditors, investors and employees that the company has a future if they tough it out.  In such cases, commissioning a market study by an industry-wise consulting firm may be warranted.

5. Clean Up The Balance Sheet

Customers will bristle at more aggressive collection policies, but as long as the company's collection policies are within industry practices and communicated clearly and honestly, these policies should not impair relationships.  In many cases, cash flows can be improved without impacting collection policies.  Evaluating accounting controls and procedures pertaining to the revenue cycle are especially productive in terms of identifying "lost" revenue opportunities.  (In one engagement, $70,000 dollars per month of revenues was identified as never being billed to customers, and adjustments to the billing system eliminated that revenue leakage.)

To identify and mitigate these risks, the turnaround team should first evaluate the adequacy of all valuation accounts.  Next, fixed assets and intangibles should be evaluated for impairments.  While impairment charges will not affect cash, they may impact debt covenants.  Another area is the adequacy of tax liabilities, including property and sales taxes.  Should tax contingencies be identified, many taxing jurisdictions have voluntary amnesty programs that forgive penalties and/or interest on outstanding taxes.

Once the team begins the due diligence process to either sell the company or obtain additional funding, the importance of a clean balance sheet becomes clear—because prospective investors will focus on the balance sheet to evaluate the company's strengths and weaknesses.

6. Change Processes To Increase Productivity

Changing policies and procedures is laborious and requires detailed knowledge of products, delivery systems, personnel qualifications and operating assets.  Knowledgeable middle managers are key in a turnaround because, given the limited time window available, shareholders do not have the time necessary to hire a consulting firm and bring in dozens of consultants to learn the business and make recommendations.

Middle managers need to understand the importance of the process they are undertaking.  Conveying the urgency for the turnaround is always a fine art; the turnaround team wants to convey a need for change without sending a doomsday message.  Besides realizing what needs to be accomplished, middle management also needs to be convinced that the restructuring is necessary.  This obligation to "convince" them falls on the CEO and his or her direct reports.

7. Communicate Clearly

Mixed messaging is detrimental to the turnaround because it increases the risk that unnecessary expenditures may occur causing confusion both internally and externally.  With all of the operating changes implicit in a turnaround, it is important to provide crisp messaging and eliminate excess "static." The turnaround team has to provide the leadership, press releases and scripts to ensure that a consistent message is delivered to employees, customers, vendors and bankers.

During the process, the company cannot afford deterioration of its customer base.  Thus, communicating with customers and taking steps to retain their business is key for the turnaround's success.  It's up to the CEO to communicate the effects of the turnaround on service delivery to customers, and for key accounts, a personal visit is often required.

Successfully forecasting the effect of turnaround plans on customers, and honestly communicating such effects, is vital for retaining customer trust during this difficult phase of a company's evolution.  Thus, it is advised to vet both internal and external communications with a public relations professional who is familiar with the company and its history—one who can assist in articulating the new scope of the company's operations for both press releases and internal employee communications.

 

 

Depending on the company, one or another of the seven points described above may play a larger role in favorably influencing the turnaround.  Two denominators that apply to all seven are authority and speed.  Those executives leading the turnaround must have the full backing and authority of the board of directors, and swift action is necessary to stop cash losses and begin the process of restoring confidence with employees, customers, vendors and investors.

 

Friday
Nov012013

Is your company  doomed?

Is your company doomed?

Did you ever think that there is a relatively good chance that your company is doomed? Here I mean doomed in the sense that its best days are behind it and, if somebody doesn't do something drastically different, and soon, that's never going to change.

I’m talking Xerox doomed. Sears doomed. Kodak doomed. Radio Shack, Research In Motion – and perhaps many more.

What's sad is that it doesn't have to be that way. Just about any troubled company can be turned around. It does not matter if the company is getting crushed by a big competitor, losing market share, bleeding red ink, zero growth, lost its way, whatever the cause, it can be done in many cases.

I don't have some magic formula for corporate success. It's not like a miracle diet or a cure for baldness. On the contrary, there's rarely a single, simple answer to jump-start a company. Companies are complex entities with many moving parts. Global markets and supply chains are complicated. Competitors don't behave the way they should. And companies are led by human beings with free will and all sorts of bizarre motives, idiosyncrasies, and imperfections.

It's no wonder that turnarounds can be tricky. Most turnarounds are hard, really hard. Nevertheless, the simple truth is that it can be done. I believe that most company can be turned around – provided it is not too late.

So why don't all those doomed companies turn themselves around? Good question. Here are the top five reasons why your company may be doomed:

You could have the wrong C-level team. Is there any doubt that somebody other than Lou Gerstner probably couldn't have turned around IBM in the 90s? Or that Leo Apotheker couldn't follow in Mark Hurd's footsteps at HP? Clearly, Howard Schultz was able to do what Jim Donald couldn't -- turn Starbucks back into a growth company. Carol Bartz made some of the right organizational and restructuring moves but didn't have a gut feel for the market, the brave new world of social media and mobile platforms. Without the right leader, it's not going to happen.

You're not doing anything differently. You have heard about the definition of crazy is doing the same thing and expecting a different result? If that's true, then many boards and management teams must be dreaming. They stay the course, stick to the plan, bleeding red ink while desperately hoping a miracle will happen. Or they make tiny incremental changes and die the death of a thousand cuts, like Scott McNealy and Jonathan Schwartz did to Sun. Hope is not a strategy. Neither is stay the course and go down with the ship.

You're waiting too long to make a change. One thing that's constant in the business world is that the rate of change is not only increasing but accelerating over time. And yet, boards and management teams sometimes still operate at a snail's pace. They wait too long to make a change. Companies like Kodak, Sprint, and Sony have kept the same CEO at the helm far longer than they should. Turnarounds don't happen overnight, but it shouldn't take more than a year or two to know if you've got the right person in the job. That's the one thing HP's dysfunctional board actually did right -- getting rid of Apotheker so quickly.

It's a complicated mess. Just as surely as laziness and inaction can destroy a company, the opposite -- complexity and chaos -- could have the same affect. The first thing Steve Jobs did when he came back to Apple is cut dozens of programs and products so the company could focus on doing a few things and doing them well. I can't tell you how many times I've seen executives try to fix things by starting one project after another or using some complicated strategic planning process that could only be dreamed up in a business school or a big management consulting firm. That's not how it works.

You're not asking the right people the right questions. If you don't have a really solid, genuine understanding of what's going on inside the company and outside in the market, you'll never fix any big problems. It amazes me how top management teams can go on for years and years without ever asking its most valuable stakeholders -- employees and customers -- what they think is going on, what the company's doing wrong, and what they think the company should be doing. That's always where the answers lie. Always.

Don't get me wrong. Turning around companies is hard work – very hard work. But it's never going to happen if you don't at least get the basics right and, more often than not, boards and management teams fail to do that. If you turn those five failure modes we just talked about around, you get the key ingredients to a successful turnaround:

- Get the right leadership team

- Do things differently

- Move quickly

- Simplify and focus

- Ask the right people the right questions

 

Tuesday
Oct292013

Welcome !

 

Hello, My Name is Erich Stolz.

Welcome to my Blog.

I trust you will benefit from the various articles posted on this blog.

You are welcomed to make comments or remarks to any of my articles.

Thank you for your interest!


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