Turning A Company Around A Case History
Oct 24, 2009
This is a case history of a distribution company turned around from a net operating loss of approximately $7.0 million to a net operating profit in excess of $23.0 million. As President of this company and in charge of leading this turnaround, the following are a few important lessons:
1. The importance of cash - as simple as it sounds one of the most important rules is that CASH IN must be greater than CASH OUT on a sustained basis. A rolling 13 week cash flow forecast should be prepared. This cash forecast should be reviewed and compared to actual data on a monthly basis. Any unfavorable variances need to be addressed and corrected immediately. It is good to have sales and cash balances reviewed on a daily basis to get a sense of the state of your cash position. Cash is truly KING.
2. A monthly comprehensive and critical review of profit and loss statements, comparative balance sheets, and cash flow statements is mandatory. At a minimum, your financial statements should be compared to industry benchmarks. All variances should be investigated and corrected. There should be active discussions and actions relating to opportunities to reduce expenses, increase sales, increase cash flow and timing of outflows. A complete and continual review of productive and unproductive assets should be made.
3. Free Cash Flow is important to prepare and review on a monthly basis. Free Cash Flow usually represents cash available for:
A. Paying down debt
B. Paying dividends to shareholders
C. Distributions to all of the company's securities holders
D. Funding company growth
E. Potential buy back of company stock
Also, Free Cash Flow is usually a leading indicator. For example, if cash flow is increasing over time then this usually signals a potential for increasing earnings. Conversely,if Free Cash Flow is decreasing over time then this usually denotes a possibility of future problems.
4. A break even analysis should be prepared on a quarterly basis during the early stages of a turnaround. Continually, you should work on decreasing your fixed and variable costs. It is important to try and determine the proper trade off between your company's fixed and variable cost structure. By periodically verifying your organization's break even sales, you can develop a better understanding of the ramifications of proposed changes in your organization's:
A. Price points for each product
B. Addition or reduction of your product's cost
C. Addition or reduction of personnel costs
D. Addition or reduction of overhead costs
E. Variable cost components
F. Fixed cost components
G. Other potential financial decisions
5. It is important to continually measure your initiatives and take corrective action if the resuts are not the desired results. Remember the saying " What you measure is what you get." It is very true.
6. This is not an exhaustive compilation of all the elements of a turnaround. One important topic to discuss is the psychology of a turnaround. At times, it is easier to turn an organization around financially then turn the people's mental outlook around positively. That is the topic of another paper.