I was recently asked what, exactly, a turnaround specialist might be doing in the first 90 days of a struggling company. It’s not magic, it’s just work, a lot of it the sort of basics that good managers should know and do - and that we regularly see failed to get done. In practice, after getting a feel for the basics - the cash, then the debt and assets, then the people - we want to know what the strategy is. There’s a reason the basics come first.
Get Serious About Cash Flow
If you bring on a turnaround specialist like me, one of my first actions is to stop worrying about your profit and loss statements and get serious about cash flow. Because when it’s crunch time and you’re strapped for cash, the P&L is just a nice-to-have. Cash is what keeps the lights on. What’s coming in? What’s going out? How much cash do we have today? Tomorrow? Where will we be in a month? Is there enough?
The first lever is receivables. Manage your accounts receivable aggressively, push for 30 days or less. Treat the customers who pay on time like gold. Those are the people who deserve your best service and support.
Good operating cash management doesn’t always involve getting paid faster. It can also mean paying your bills slower. The truth about payables is that they’re a form of free cash, a form of working capital. Don’t pay them too early. A benchmark is 45 days. If you have to, sit down with vendors and renegotiate terms to give you that time - do it as part of working out your wholesale rates for raw materials, if possible. But don’t go much beyond 60 days.
All of this comes together in the traditional 13-week cash flow plan, and thirteen weeks is roughly the first ninety days. Grab the account registers of all your bank accounts, and get the record of every check, cash, debit, and credit card payment that you’ve made in the past 60 days. Paste it into a spreadsheet, broken down by week. Now you can see how much money you typically spend each week. Many of your payments will be the same amount each month, so you can project them out for 13 weeks. This simple step gives you a snapshot of your cash going out. The next step is to figure out what’s coming in. For every outstanding receivable you’re expecting to get, project it forward weekly so you can see what’s coming in. Then do the same for your payables — figure out when they’re due, based on their terms, and forecast what’s going out. With these two numbers, you’ll have a much better handle on your cash flow, and you can fine-tune your purchases and payments accordingly. A lot of free spreadsheets for this simple 13-week plan are available online. Don’t just create a forecast. Use it.
Capital Structure
With cash in view, the specialist turns to debt. Your company’s capital structure is just a fancy way of saying its debt, investment and retained earnings. This is the stuff that finances your assets, which in turn generate sales. The debt part of your capital structure should be matched to the life of the assets it funds. Short-term assets like accounts receivable and inventory should be financed with short-term notes, usually lines of credit. Long-term assets such as property, plant and equipment should be financed with debt that is structured to match the asset’s useful life.
Too much short-term debt, with aggressive repayment terms, can put unnecessary pressure on your business. Too much short-term debt, with interest-only payments, can be an enticement to “generate cash flow” by borrowing. That can make the company look healthier than it really is. Any company in financial trouble should restructure its debt immediately; but even healthy companies restructure their debt regularly to improve their performance and cash flow.
The same test applies to what the company owns. Buying assets is often a necessity, but they’re supposed to work for you, not the other way around. Every single one should make enough money to pay for its own loans and the cost to operate and maintain it, and then have some left over for profit. If it doesn’t, it’s dragging your resources and your profits down; sell it, ASAP. This is all good stuff to talk about, but it’s nothing you can implement without a willingness to toughen up.
Define the Plan for Your Leadership Team
Then come the people. Sit down, and pretend you’re starting your business from scratch. Draw out an organizational chart, with job titles and descriptions, but no names. Think about what each management position really requires in the way of skills and abilities. Now take the people who work for you, and decide where they fit the best. You’re probably not going to be able to fill every position. The ones you can’t fill are the ones you should hire for. If you end up with managers who don’t fit any of the jobs, they might have to go once you’ve found someone better. Meanwhile, keep working with them so they understand what you expect. It can take up to six or nine months for this to work.
None of this is complicated, but it can make an amazing difference for any company. It may take a while, and it might even mean re-shuffling who has how much authority and what responsibilities in the leadership structure. Little things, like holding weekly meetings with your leadership team, are still bound to impact the bigger picture of your company. These weekly get-togethers hold leaders accountable for their progress, which means that the company can move away from day-to-day operational issues and focus more on getting better. What does getting better mean? Focus more time on improving the bottom line. Do this by identifying your most profitable customers and markets. Good customers don’t leave you scrambling for resources or delay payments. They should also, ideally, be part of a growing industry.
Not everything you want done gets done in 90 days. People replacements can take six to nine months. But you can give yourself a foundation that makes any of that easier. You can map out the next 13 weeks of cash, and make sure the collections and payables systems are under control. You can match debts to assets, and sell all the dead weight. You can define the plan for your leadership team. Once you’ve got that much done, you can look at three years. And then ten. And you can re-examine your mission - what you do, and reestablish your core values - how you do it.
