Financial Crisis Management - Early Stage Awareness and Prevention
September 2005
Business owners, CFOs, and others gathered to discuss financial crisis management – early stage awareness and prevention. The first part of the roundtable focused on warning flags in three stages of financial crisis. The latter part of the discussion addressed the "fix," or steps to take to turn the crisis around.
Stage 1 - Recognizing Risk Factors
- Dependence on a single customer (or customer concentration)
- Pricing pressure/cost pressure/customer squeeze
- In a high cost/low margin industry
- Technical advancements by competitors
- High employee turnover in key functions or positions
- Poor communication across the board
- Lack of a champion or leader for the organization/too many leaders
Stage 2 - Early Warning Signs
- Loss of a key customer
- Loss of key employees
- Critical information is not timely
- Lack of measurables, such as turns and margins (i.e. "running blind")
- Lack of diversity in customer base
- Inventory buildup (primarily a sign in the manufacturing industry)
- Too much focus on profit/loss statements and not enough attention paid to cash flow, balance sheet, and throughput
- Sales and/or earnings decrease as compared to comparable periods
- Percentage cost increase exceeds percentage sales increase
- Poor detail in chart of accounts (numbers lumped together)
Stage 3 - Financial Crisis in Full Swing
- Denial in all aspects: financial, psychological, and emotional
- Meeting cash requirements is difficult. Overdrafts occur
- Credit lines are fully utilized
- Loan covenants are violated
- Pressure from vendors for payment increases
- Cost reductions become necessary
- Capital spending programs are curtailed
- Hiring freezes and pay freezes are implemented
The "Fix"
Management and Communication
- Acknowledge the situation and get past denial
- Align the management team to address the problem synergistically
- Reinforce the management/leadership team with outside consultants, such as the accountant, attorney, and banker. The owner may need to be prepared to convince management they need outside help
- Pro-actively communicate company-wide, including negative messages. Let all employees know the plan, what the key focus will be, and how they can contribute to the solution. Continue to communicate progress with everyone on a regular basis verbally and visually
- Don't kid yourself. There are "no" secrets in a closely-held business. Don't let gossip or assumptions muddy the waters
- Do a root cause analysis and open up with financial information. Look for deeply seated ways of doing business that need to change
- You can't "sell yourself" out of a crisis
- Know your industry and customers' economics
Metrics and Measurement
- Create a timeline to put the plan in place. Set up a specific time frame for recovery actions. Openly consider your options:
- Cycle time of product
- Cost cutting measures
- Chapter 11
- Shutting down a division or product line
- Price cutting on products - Set up internal metrics using bank, industry, and loan utilization standards
- Have the leadership group set metrics, and hold non-performing groups accountable. Monitor these metrics on a daily, weekly, or monthly basis
- Set monthly meetings to look at ratios, past performance and compare the current/future budget
- Prepare and use budgets. Plan for capital needs. Identify value drivers and areas for cost reductions
- Prepare a working capital forecast, operationally versus collections
- Use flash reports with estimates up or down
- Focus on 3 year comparisons of quotes
- Establish an accounts receivable schedule
- Get a weekly back log report
- Convert non-performing assets to cash
- Look at accounts receivable and inventory that may be old or obsolete and convert to cash
Other Key Areas of Action
- Identify and work to resolve succession issues
- Retain a third party for objectivity
- Don't let the tax tail wag the business dog
- Have a financing plan in place
- Get tax advice versus financial advice
- Develop and maintain ongoing communications with suppliers and bankers. Have a plan for recovery and be forthcoming. Ask them to work with you and contribute to the solution. Let them know upfront and keep them apprised of status. Just ask – don't underestimate what your vendors will do to help. Examples are to set up paid with paid clauses, and ask for extended payment terms when new large accounts are landed
