"How did you go bankrupt?" "Two ways. Gradually, and then suddenly."
Hemingway's words in "The Sun Also Rises" aptly sum up the past year and will likely headline the chapters of the foreseeable future. Without question, we are experiencing the fastest deterioration of economic conditions in several generations. Few sectors will be spared. Many companies have already fallen victim to circumstance, and many more are struggling for survival.
Among the factors that will separate those that fail and those that weather the storm will be an ability to face reality, ask tough questions and take swift and decisive action that preserves enterprise value. Unquestionably, conserving cash will be the cornerstone of survival. Proactive, real-time monitoring of business performance will enable management to take necessary steps and maintain focus on critical drivers. The rest will depend on the skill sets of the leadership team. Are they the right horses for the course ... today?
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Cash is king: Make the tough choices. Whomever you wish to quote,
Alex Spanos' "Cash is king," or Murphy's "He who has the gold makes the
rules," both point you in the same direction: Keep the till full.
Implement a 13-week cash flow plan, insist on weekly monitoring and
question permanent versus temporary variances. Cut all nonessential
spending, including capital expenditures and R&D projects. While
this may affect the business down the road, it is better to be a
viable, if not quite state-of-the-art, business, than be part of the
carnage. Review all projects requiring excessive spending where the
return will not be realized within 90 to 120 days. Tighten travel
policies and supply purchases, change the authority spend matrix to
reduce limits and require significantly more approvals to make
purchases. Pay attention to all working-capital accounts, as there is
generally significant low-hanging fruit to pick. Make the tough
decisions, reduce unnecessary capital investment and cut back as much
non-personnel-related spending as possible.
Real-time monitoring of critical KPIs. The more you know, the
more you recognize what you don't know. In addition to the handful of
industry statistics most CEOs regularly review, ask the company's
sales, operations and financial leaders to provide five
mission-critical key performance indicators that can be benchmarked and
monitored daily or weekly. Force all senior executives to be on the
same page -- literally. The KPIs selected will shed light on how these
business leaders think and what information they use to make decisions.
Rather than wait for monthly financials, with the accelerated frequency
of these statistics, management can act faster if an indicator begins
to slip.
Ensure you have the right horses for the course. Many recent
investments were made on growth stories -- and, accordingly, are being
led by growth-oriented management teams. Today's near-term realities,
however, require very different skill sets. Business leaders who
recognize this will set themselves apart and stand the best chance of
positioning their companies for the long term. CEOs who embrace
proactive action, demand accurate and timely information and are able
to make difficult choices in difficult times are most likely to
succeed. In some cases this means recognizing that outside resources
may be required. The question is: "Can the C-suite be coached, and can
they tolerate being challenged?" Management teams who automatically
push back or think that everything is under control or that it's not as
bad as it appears, or that the company will come out of this by the
next quarter, may not be the right horse for today's course.
Every CEO must take the necessary steps to protect liquidity to
maintain value and mitigate risks to the enterprise. The more cash on
hand, the longer runway you have to effect change. Making those
decisions requires real-time information and monitoring of critical
indicators, allowing business leaders to be proactive versus reactive.
Inaction, pushback and denial all suggest the current management team
may not be the right one to chart a successful course. Remember,
deterioration can happen in two ways, gradually, then suddenly.
Jeff Feinberg is a managing director and national practice leader
of the private equity performance improvement group of Alvarez &
Marsal Inc.
