Paul Denton - Triage Before Turnaround – Part 1 of 4
Posted by Andre Mazerolle on Fri, May 13, 2011 @ 12:47 PM
By Paul Denton, CA (NZ) CIRP
When a business is in distress, it is imperative that a leader stabilize and get control of the situation to afford time to implement a turnaround plan. In effect, perform triage on the ailing company – prioritizing actions to gain control and stability.
This four-part article sets out the key actions in order to stabilize the overall situation of a distressed business. Namely, in order to preserve and maximize the resources needed to survive in the short term and be able to implement a successful turnaround, it is imperative to establish controls over all cash and assets.
Triage Actions to Prepare for a Turnaround
- Part One - To ensure that sufficient cash is available to fund short-term needs and to fund the restructuring process.
- Part Two - To ensure management buy-in and to establish a core team that is committed to the success of the project.
- Part Three - To ensure that assets are safeguarded and preserved to maximize resources available for turnaround.
- Part Four - To understand the key financial and operating issues in order to rally short term support from stakeholders.
Triage Action Plan
Whether you are sitting in the driver’s seat as a beleaguered CEO/President or you’re a frustrated Board who has hired an interim CEO or CRO (chief restructuring officer) hired to “stop the bleeding,” the key to the next 60 days is prioritization. Below are the triage actions, but the order will depend on a number of internal and external criteria – such as the patience of your creditors (and investors), the capabilities of the rest of the management team, sales projection status, burn rate, and the list goes on. Every situation is different and there isn’t a magic bullet. However, our advice, if you are unsure of where to begin is to always remember that cash is king – begin by establishing a cash-conservation program.
Establish a Cash-Conservation Program
- Obtain and/or prepare detailed rolling short-term weekly cash flow projections and lender borrowing base calculation (minimum of 13 weeks) to understand the size of any short-term liquidity issues (the “liquidity gap” availability per operating lender line of credit vs. funding requirements);
- Conduct high level review to confirm:
- Current opening financial position/updated snapshot re:accounts receivable, inventory, AP, etc. (e.g. ensure payable listings are complete, rebook outstanding held cheques),
- Assess accuracy, availability and appropriateness of management reporting information,
- Examine opportunities to expedite billings and accounts receivable collections;
- Assess opportunities for postponement or deferral of payments with major creditors/suppliers;
- Review other non-cash working capital items to determine the potential for accelerating conversion to cash;
- Conduct a detailed review of operating expenses and capital spending to identify expenditures that can be deferred or eliminated without compromising the business or “cutting into muscle”;
- Assess the need to immediately centralize control of expense approval & cheque issuance;
- Identify redundant assets that can be sold;
- Identify any excess leverage capacity to support additional short-term borrowings; and,
- Develop documentation and system changes necessary to effect short-term cash conservation measures.
- Complete high level financial diagnostic – typically address issues relating to strategy, operations, management, support infrastructure and financial issues; typically leads to identification of “quick hit” opportunities –with short implementation timeframe, which produces immediate cash savings.
In part two of this article, we will look at management and how by focusing on your management team, you can stabilize the overall situation of a distressed business.
Paul Denton, CA (NZ), CIRP is a Vice President with Farber Financial Group. His practice focuses on corporate reorganization and insolvency. Paul can be reached in Toronto at 416-496-3773 or pdenton@farberfinancial.com. Click here for Paul Denton's bio.