Coming into a company that has gone through a long bankruptcy or a slow death march toward the same requires bringing in some new energy and a new focus. For this, I have found no more effective tool than the four o'clock meeting.
There are many items that need specific, focused attention. Management may not have focused on these things for some time due to the stresses of bankruptcy, etc. Cash collections, customer business engagement processes, strategic procurement, etc. Whatever the list (and you must have a list), these items need special attention and are not in the normal day-to-day focus of the management. And they already have a full-time day job.
So 3-4 days per week, I would hold a four o'clock meeting. This meeting would focus specifically on these items that require change from past practices. The agenda would be published in advance such that everyone could be prepared. Not every item would be covered daily, but each item would be discussed once per week or at most every other week. It is held at the end of the business day to set a tone that this is the time for management to focus on longer term requirements -- not part of the day-to-day. It also can turn into a good time for the team to unwind and bond. There are many stresses they went through in bankruptcy and in a sale process. They are under pressure from the new ownership. It is a great opportunity to build the team.
It is also a good teaching opportunity. For example, if one item regards cash flow: instead of this being a discussion between the treasurer and CFO, it is now a discussion for all of management. Isn't that where it belongs? Or if the topic is sales strategy: shouldn't operations understand the thinking and dialogue on customer related decisions? Apart from the fact that this shared knowledge will help each member of management perform better each day, there is also a strong benefit of exposure to all business issues, thus better developing complete business managers.
It also allows for management to have a say in the future of the business -- a complaint often raised, when only one or two top executives might make decisions as if they were dictators.
Altogether, I have found this to be one of the most productive and useful methods to achieve lasting change and success -- and as a side benefit, a great teaching tool and team-building opportunity.
Tuesday, March 23, 2010
Monday, March 8, 2010
The Cash on the Balance Sheet
The balance sheet is often overlooked. What I have found in struggling companies is that -- at best -- there was some management focus on the P&L (even this is rarely so). It is certainly so that most people focus on the income statement and the levers that can change this far more so than the balance sheet. Ignoring the balance sheet, or giving it only passing attention, is a mistake that a) disallows opportunities for one time cash generation, and b) contributes to the possibility of future failure.
In virtually every turnaround situation I have encountered, the balance sheet was a source of funds -- and at the beginning of the process, by far the most important source of funds. One can often recover 50% or greater of the purchase price of the company within 6 - 18 months by working on making the balance sheet more efficient.
There are countless opportunities: inventories, receivables, payables, unused assets, life insurance policies, joint ventures or sideline businesses, and others. Each one of these is an avenue to collect cash to pay down acquisition debt, and is also an area for focus to improve ongoing operations.
The process is quite straightforward. Go through the balance sheet line by line, and in this go through the details behind every item. Consider the opportunities:
1) Inventory: how many days of inventory is the company carrying? Using competitive data or even internal plant-by-plant best-in-class benchmarks, where are the outliers?
2) Payables: during bankruptcy, many suppliers demand cash on delivery or cash in advance. Develop strategies to change this, and certainly if possible as a win-win.
3) Idle facilities: they only cost money the longer you keep them.
4) Life insurance policies: this sounded strange to me until we once were able to use these as a funding source to cover a significant percentage of the purchase price of the company.
5) Side businesses: don't be surprised if a company that has found its way into bankruptcy also found ways to invest in businesses that have nothing to do with the core operations.
6) Receivables: ensure that customers are paying on time.
Assign people to each of these. Meet with them regularly. Monitor and track the results and hold them accountable. By showing them it is important to you, it will become important to them.
There was a time that it was hard for me to imagine that a company headed toward insolvency would not have found ways to unlock this cash -- certainly religion is found when survival is at stake, or so I thought. Equally as amazing is that these sources are not found during the period in bankruptcy. Creditors certainly would love to get paid back more of their due. After a time, I stopped being amazed.
Additionally, many of these opportunities can be used for an ongoing efficiency focus. For example, beyond cost structure -- and maybe the most important item to improve the cost structure of an operation -- inventory reduction and efficiency will contribute to the efficiency of the P&L. Additionally, an ongoing emphasis on receivables will help ensure that customer quality is taken into account when planning new sales initiatives.
I have seen the balance sheet overlooked countless times -- before going bankrupt, during bankruptcy, and very often by new management teams after emerging from bankruptcy. I cannot overemphasize the importance of this focus -- for immediately recovering some portion of the purchase price and for the long term financial health of the company, a focus on the balance sheet is as important and in some ways more important than a focus on the P&L.
In virtually every turnaround situation I have encountered, the balance sheet was a source of funds -- and at the beginning of the process, by far the most important source of funds. One can often recover 50% or greater of the purchase price of the company within 6 - 18 months by working on making the balance sheet more efficient.
There are countless opportunities: inventories, receivables, payables, unused assets, life insurance policies, joint ventures or sideline businesses, and others. Each one of these is an avenue to collect cash to pay down acquisition debt, and is also an area for focus to improve ongoing operations.
The process is quite straightforward. Go through the balance sheet line by line, and in this go through the details behind every item. Consider the opportunities:
1) Inventory: how many days of inventory is the company carrying? Using competitive data or even internal plant-by-plant best-in-class benchmarks, where are the outliers?
2) Payables: during bankruptcy, many suppliers demand cash on delivery or cash in advance. Develop strategies to change this, and certainly if possible as a win-win.
3) Idle facilities: they only cost money the longer you keep them.
4) Life insurance policies: this sounded strange to me until we once were able to use these as a funding source to cover a significant percentage of the purchase price of the company.
5) Side businesses: don't be surprised if a company that has found its way into bankruptcy also found ways to invest in businesses that have nothing to do with the core operations.
6) Receivables: ensure that customers are paying on time.
Assign people to each of these. Meet with them regularly. Monitor and track the results and hold them accountable. By showing them it is important to you, it will become important to them.
There was a time that it was hard for me to imagine that a company headed toward insolvency would not have found ways to unlock this cash -- certainly religion is found when survival is at stake, or so I thought. Equally as amazing is that these sources are not found during the period in bankruptcy. Creditors certainly would love to get paid back more of their due. After a time, I stopped being amazed.
Additionally, many of these opportunities can be used for an ongoing efficiency focus. For example, beyond cost structure -- and maybe the most important item to improve the cost structure of an operation -- inventory reduction and efficiency will contribute to the efficiency of the P&L. Additionally, an ongoing emphasis on receivables will help ensure that customer quality is taken into account when planning new sales initiatives.
I have seen the balance sheet overlooked countless times -- before going bankrupt, during bankruptcy, and very often by new management teams after emerging from bankruptcy. I cannot overemphasize the importance of this focus -- for immediately recovering some portion of the purchase price and for the long term financial health of the company, a focus on the balance sheet is as important and in some ways more important than a focus on the P&L.
Monday, March 1, 2010
Business Engagement
This will be the first of what I expect will be many posts on this subject. What do I mean by business engagement? In the big picture, to me it means everything from market and customer analysis through pricing and ultimately contractual terms and conditions. Identifying where and how the company wants to sell products, the products it wants to sell, how it will sell these, and how it will price them.
However, for today, I will focus on pricing. I do this because, in an intensive turnaround, the bigger strategic questions of market analysis, customers, etc., are not the first priority. Right now, the company is pricing product for sale. Right now, the company is agreeing to contractual terms and conditions. Right now, little if anything can be done about orders already booked but something can be done about those in process and to be booked. Right now is not the time to figure out if the company has the right long term strategic focus.
Coming out of bankruptcy, the company likely already has a hole in the order book. It already has customers that are leery of the company's future and certainly leery of the new ownership group. The customer base may already be upset about having to support the company through the bankruptcy period. So, right now is not the time to add to the concerns of the customer base about potential changes in long term strategic issues.
However, ensuring that new orders are booked that will enhance profitability should be an immediate concern. This will likely require a changed signature of the company in its face to the customer. This is already enough of a change to deal with, without introducing questions of longer term significance.
Certainly, communicate with your customers. Let them know where you are and your intentions. These intentions can certainly include the idea that you will take some time to develop long term plans that fit the company's and the customer's expectations and needs. My experience is that customers will allow for this time and will work with the company and new ownership -- especially if they already have provided support through a bankruptcy.
The immediate focus internally regarding business engagement should be pricing and contractual terms. Understand the company's practices today. Understand the models, formulas, templates -- if they have any. Unfortunately, I have found that the extent of involvement in this subject doesn't extend beyond the sales office -- little support from finance or legal. Little involvement from engineering that will develop the product or from operations that must deliver it. Little idea of the validity of the cost structures that will be employed to achieve success -- and no dialogue with operations and engineering to communicate where the cost must be in order to win a project or secure a sale.
Generally, what is lacking is a process and communication toward a common understanding and objective; involvement from all aspects of the organization that will have the responsibility to deliver; assurance that the cost structures are built with discipline. This discipline can include the identification of challenges that must be met in order to achieve targets. But without discipline in the process, how can one be sure of the required challenges?
I am not suggesting that the company, as the supplier, can dictate terms and prices to a customer that is buying in a competitive market. What I am suggesting is that the facts must be unearthed and open to the entire organization such that the organization is fully aware of where it is and the challenges that lie in front of it. Every obligation of the company should be taken with a clear understanding of what is required to succeed in fulfilling the obligation. This can only be done with well-grounded facts and data, and open dialogue among all constituents. I am also suggesting that bad deals must be recognized as such, and if the company cannot find ways to turn these into a good opportunity then the company must have the discipline to say no.
It is virtually certain, when I come into a new situation, that the entire business engagement process is contained on a salesman's desk. Yes, he will say it is coordinated with finance and operations, but when pressed, it turns out the cost data is five years old, or operations was asked for input only three iterations ago -- and the salesman didn't go back when the initial numbers were too high.
Pricing and contractual terms, along with a focus on cash, is one of the first areas that must be wrestled to the ground. Stop making the hole deeper by disallowing more bad projects and bad sales into the funnel.
However, for today, I will focus on pricing. I do this because, in an intensive turnaround, the bigger strategic questions of market analysis, customers, etc., are not the first priority. Right now, the company is pricing product for sale. Right now, the company is agreeing to contractual terms and conditions. Right now, little if anything can be done about orders already booked but something can be done about those in process and to be booked. Right now is not the time to figure out if the company has the right long term strategic focus.
Coming out of bankruptcy, the company likely already has a hole in the order book. It already has customers that are leery of the company's future and certainly leery of the new ownership group. The customer base may already be upset about having to support the company through the bankruptcy period. So, right now is not the time to add to the concerns of the customer base about potential changes in long term strategic issues.
However, ensuring that new orders are booked that will enhance profitability should be an immediate concern. This will likely require a changed signature of the company in its face to the customer. This is already enough of a change to deal with, without introducing questions of longer term significance.
Certainly, communicate with your customers. Let them know where you are and your intentions. These intentions can certainly include the idea that you will take some time to develop long term plans that fit the company's and the customer's expectations and needs. My experience is that customers will allow for this time and will work with the company and new ownership -- especially if they already have provided support through a bankruptcy.
The immediate focus internally regarding business engagement should be pricing and contractual terms. Understand the company's practices today. Understand the models, formulas, templates -- if they have any. Unfortunately, I have found that the extent of involvement in this subject doesn't extend beyond the sales office -- little support from finance or legal. Little involvement from engineering that will develop the product or from operations that must deliver it. Little idea of the validity of the cost structures that will be employed to achieve success -- and no dialogue with operations and engineering to communicate where the cost must be in order to win a project or secure a sale.
Generally, what is lacking is a process and communication toward a common understanding and objective; involvement from all aspects of the organization that will have the responsibility to deliver; assurance that the cost structures are built with discipline. This discipline can include the identification of challenges that must be met in order to achieve targets. But without discipline in the process, how can one be sure of the required challenges?
I am not suggesting that the company, as the supplier, can dictate terms and prices to a customer that is buying in a competitive market. What I am suggesting is that the facts must be unearthed and open to the entire organization such that the organization is fully aware of where it is and the challenges that lie in front of it. Every obligation of the company should be taken with a clear understanding of what is required to succeed in fulfilling the obligation. This can only be done with well-grounded facts and data, and open dialogue among all constituents. I am also suggesting that bad deals must be recognized as such, and if the company cannot find ways to turn these into a good opportunity then the company must have the discipline to say no.
It is virtually certain, when I come into a new situation, that the entire business engagement process is contained on a salesman's desk. Yes, he will say it is coordinated with finance and operations, but when pressed, it turns out the cost data is five years old, or operations was asked for input only three iterations ago -- and the salesman didn't go back when the initial numbers were too high.
Pricing and contractual terms, along with a focus on cash, is one of the first areas that must be wrestled to the ground. Stop making the hole deeper by disallowing more bad projects and bad sales into the funnel.
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