Virtually all the lessons that the case-study companies had to learn the hard way also apply to healthy companies. Most of the problems stemmed from a lack of attention to business basics. That’s exactly why financial officers of sound companies need to keep a sharp eye on the fundamentals, such as business strategies, capital structure, KPIs, controls, and cash management.
In “Turnaround Management Every Day,” John O. Whitney points out that turnarounds are not limited to financially troubled companies. To the contrary, turnarounds occur regularly in product lines, divisions, and subsidiaries within most large corporations. Whitney believes that many of the methods that turnaround managers use can restore a company’s vitality and prevent financial difficulty from taking root to begin with. For example, turnaround managers generally try to flatten organizational charts (just as GenRad and Forstmann did), streamline decision making, and improve their companies’ flexibility and mobility.
As several of the case studies show, these specialists emphasize cash generation and cash forecasting, and they typically find opportunities to raise cash by selling assets and reducing accounts receivable and inventory. For some senior managers, questioning cash forecasts and requiring sensitivity analyses is a way of understanding and monitoring day-to-day business activities. Turnaround managers talk to all the important stakeholders, such as bankers, customers, vendors, middle managers, and other employees. With due respect for established reporting relationships, these are just the people senior managers must talk to daily to stay informed, have a feel for the business, and reduce their dependence on subordinates, who may report only what the boss wants to hear.
Stephen Grace, president of a firm that advises companies on turnarounds, and Robert Sartor offer some additional guidelines for CFOs of healthy companies. Although some of this may seem basic, companies ignore the fundamentals at their peril.
Management focus. A clear, crisp management focus on fundamentals cannot be emphasized strongly enough. These fundamentals include opportunities for growth created by trends in the market and industry environment as well as opportunities to improve the company’s market share, adjust capital structure, and strengthen management.
Business plans. The management focus is the foundation of a good business plan, and it is equally critical for management to develop a balanced business plan in which all stakeholders participate.
Budgets and targets. To achieve the objectives of the business plan, management needs to develop financial and operational budgets, set targets, and pursue good operational tactics to achieve them.
Cash-flow management. The finance function must manage day-to-day cash receipts and disbursements and develop very good cash-flow forecasting capabilities. The importance of concentrating control of the purse strings in the hands of a few people cannot be overemphasized.
Metrics, metrics, metrics! Balanced scorecards of financial and nonfinancial measures are the “report cards” for crucial functions like cash-flow management. Balanced scorecards include the key performance indicators that measure the fundamental health of the business on a daily basis, and they are absolutely vital to any company’s long-term profitability. No lesson stands out more in our analysis.
Accountability. The inescapable light of accountability is another key ingredient to success, whether in a healthy company or a turnaround. It is one of the fundamental attributes of corporate health.
Financing. CFOs must understand what drives the company’s cash flows and monitor those factors. They must also understand the inverse relationship between industry volatility and debt capacity. Grace says such an understanding is essential for running the business and explaining it to lenders and investors.
Stakeholders. On the less tangible side, “Understand your protagonists,” Sartor advises. Appreciating the viewpoints of lenders, suppliers, shareholders, and other stakeholders is always critical. Come crunch time, however, CFOs must do what they think is right for the company.
Bargaining position. Similarly, bargaining position is a key factor in any negotiation. The CFO and treasurer should identify the relative strengths the company and the lenders have and how each side might counter the other’s leverage.
Lending syndicates. The CFO or treasurer must be alert to problems within and among lending syndicates because lenders are always competing, Grace points out. Certain lenders may not mesh because of different corporate policies or personal animosities. But the CFO or treasurer should be prepared to intervene on behalf of the company if relationships within or among the syndicates appear to be bogging down.
Covenants. Covenants are critical, too, and the time to negotiate them is at the beginning. The company should be aware of different lender proclivities and retain the right to approve buyers of syndicated interests. In a troubled situation, for example, the policies of foreign banks may be far different from those of U.S. banks. The company also has to watch out for “progressivity,” that is, covenants whose requirements change over time. For example, a company just emerging from a restructuring has to guard against covenants that require its financial performance to improve at an unrealistic rate. It needs breathing room.
CFO Role. Most important of all, remember that “The buck stops here!” Sartor reminds CFOs that they must always be prepared to deal with critical issues. Passive CFOs who allow themselves to be “bullied” by CEOs in times of actual or imminent crisis are open to legal consequences. CFOs have to do what they think is right, even at the risk of losing their jobs.
By the same token, the CFO can’t bear this weight alone. The CFO and the finance function should have the CEO’s full support in assuming joint ownership of KPIs and financial targets with operating management. And the CFO must have an explanation from operating management any time it cannot achieve those targets. A prospective CFO who does not sense that the CEO would provide this kind of support should not even consider taking the job.