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The Upside of Down:
Managing Your Company Through Financial Crisis

By Mark W. Sheffert
October 1998

It’s Monday morning. You’re the owner of your company, but you are not looking forward to going to work. You’re tired, have a knot in your stomach, and can’t focus on even the smallest tasks. These feelings and symptoms have been growing the past few months and are now at an acute level.

Your company is in a death spiral. Trade creditors are threatening to sue for non-payment of bills. Vendors are either not shipping parts or only on a C.O.D. basis, and manufacturing cannot complete open orders. Customers are canceling orders because of missed delivery dates. And as a result, salespeople aren’t receiving commissions and some are looking for other jobs.

The company can’t meet payroll in two weeks --- and it is behind in fiduciary tax responsibilities. The bank has given notice of loan covenant defaults and a 45-day cure period or demand for pay-off.

You have been working 70-80 hours a week. Your personal assets which you pledged under the personal guarantee in order to get the bank loan are at risk. Your spouse has expressed concern for your health, marriage, the non-existent relationship with your children, and a void social life.

If this sounds familiar, you’re probably doing what many others have done in your situation: practicing "professional avoidance" of creditors, vendors, the bank, your own management, spouse, children, friends, etc. Somehow you believe this tactic will make the pain disappear.

Well, denial is not just a river in Egypt. Rearranging the facts to fit your reality won’t fix your company or your pain. So … SNAP OUT OF IT! It’s possible that your company can be saved, rehabilitated and returned to profitability, but you will have to work smarter, not harder.

To decide whether it’s worth it, the first and most critical step is to address some gut-level questions about your business:

  • Is your company’s market large enough and growing fast enough to support a company like yours?
  • Are your products at least at parity with the competition and, if so, what can you do differently to take business away from them?
  • Can your products be sold with acceptable gross / net profit margins to justify being in business?

These are basic questions. However, if your market is too small or not growing, if you do not have demonstrable competitive advantages, or if in order to compete you cannot be profitable, then you should discuss voluntary surrender of assets with your secured lender. But if the answers to these questions are affirmative, you may have a business worth salvaging, rehabilitating and restoring to profitability.

The immediate next step is to develop a plan to restructure your company. Whether you do this by yourself or hire an experienced turnaround expert, the mantra should be: CASH IS KING! To determine your cash position, run projected cash flows on a daily basis for the next two weeks, and on a weekly basis for the next two months. Be prepared; it’ll probably be ugly!

Now address how to immediately grow revenues. Can you increase prices? Are there any function / feature benefits that can be added to your products that will allow increased prices? Can you charge for service calls? Bundle products? Sell extended warranties or service contracts?

You probably also need to get rid of excess or impaired inventory, so consider a special sales promotion discounting these products. Provide incentives to salespeople for selling the identified inventory. A special promotion is a great source of immediate cash if it is in addition to, and not in lieu of, normal sales

The most effective way to grow revenues is to talk to your salespeople. Explain the problem and ask for their ideas. Also talk to other business people at your Rotary Club, Chamber of Commerce, your accountant, your attorney, etc., who may have confronted similar situations.

Another source of advice can be your vendors. Now is not the time to avoid them, but to explain your difficulties. Ask for their patience and advice. They supply other companies like yours and have a working knowledge of the marketplace … what works … and what doesn’t.

Next, you need to do some serious addition by subtraction by cutting expenses. A dollar of revenue may put ten cents on the bottom line. However, a dollar of eliminated expense puts a dollar on the bottom line.

Take out all non-essential expenses immediately. This may be the most difficult task you ever perform, but your company’s survival depends upon it. Examine each general ledger line item and be ruthless --- get rid of rented plants and subscriptions, reduce the number of support staff, have employees job share, reduce vacations and
benefits, and eliminate all jobs not absolutely critical to continued operations.

Don’t do this alone. Ask your managers and employees for ideas. They know the company is in trouble, and want to help even if it means loss of jobs.

Now, turn to accounts receivable. Many times, when customers know a company is in trouble they drag their payments. Become aggressive in collecting receivables by designating someone who is not a shrinking violet yet has good interpersonal skills to call on delinquent receivables.

For accounts thirty but less than ninety days overdue, agree to a payment date and hold them to it. Get a definite commitment from those over ninety days. However, the time period for payment should be short (i.e. one week). Consider offering a discount of five to ten percent for immediate payment. If they don’t pay within one
week, turn it over to a collection agency or attorney.

At this point you should have revised sales projections, inventory / expense reduction plans, and an accounts receivable collection plan. Now run revised cash flow projections using these new assumptions excluding (for the time being) payments to vendors and the bank, but including delinquent fiduciary taxes.

With this new cash (or free funds) flow projection, you can now determine the company’s ability to pay off debt. You will most likely have to restructure your trade creditor debt. Create a plan to offer new terms such as paying equal monthly installments over a few years with little or no interest. They must also agree to continue sourcing you under original terms. Receiving a restructured debt payment is better for your creditors than receiving pennies on the dollar through a bankruptcy.

You will also need to design a workout payment plan for the bank. Banks prefer a viable workout plan and a restructured loan than a foreclosure and / or bankruptcy. And, bankers are not difficult to work with if you communicate with them honestly and openly. The payment plan may involve paying interest only for a period of time, or restructuring your debt over a longer period of time in order to stay within your cash flow projections.

When you meet with your bank, explain your restructuring plan and how it will restore the company to profitability. Be prepared to rationalize your markets, products, and competitive advantage, and to discuss process/ systems that will be implemented or improved to rehabilitate your company. Explain the proposed trade creditor plan and your plan for satisfying the bank debt. If you can convince the bank that you have and will continue to make necessary changes, it will likely support your workout plan.

Congratulations! You have taken crucial steps to turnaround your company and begin to realize the up side of down. Now, continue this momentum by focusing your energies on two important tasks:

  • The effective execution of the action plans you put in place to restructure the company, and
  • The development of a detailed business plan which will guide your company into the future. This business plan will also serve as the basis for future financings that may be necessary to continue recovery and growth.

Lastly, realize fatigue is cumulative. When you can’t think straight, make critical decisions, or be sharp in presentations, you are not effective. Stop working unreasonable hours and devote more time to your spouse, family and friends. Allow your body to catch up with your mind. Work smarter, not harder. Have a good night’s sleep … nighty-night.



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