Cash is King – Living the Lesson

In 2007, a large Southeast-based contractor called us at GGG for the usual reason: they were having a crisis. This call marked the beginning of an 18-month turnaround, during which the company regained its financial health to continue operating profitably.

For decades prior to 2007, business was booming. After many years of profitability, and coinciding with the broader economic decline in the USA, unprofitable long-term contracts with major customers resulted in severe declines in cash flow and ultimately the business overall. Its unsustainable position also put the operations of the utility company’s customers in jeopardy.

Business Facts, Not Beliefs – To the Bank, It’s All About the Money

Anxious about these alarming trends, the bank cut back on the company’s availability (they decreased the amount the company could borrow against their receivables), shrinking the cash available to operate. When we arrived, we were asked to act as advisors to find new financing opportunities, to streamline operations and to act as interim CFO.

Besides the unprofitable contracts and unfavorable cost structure, the company was operating in a saturated and highly competitive market. It therefore had limited ability to raise prices despite improved operations.

Banks, naturally, like to rely on numbers rather than hopes and promises. Thus, in order for any troubled company to get financing, the company needed to be fixed first. When it was clear to the bank through facts and data that the company has regained its stability and had long-term growth potential, the bank was more likely to provide additional funding.

What We Did

First thing was first – and I recommend this for you and your business – we renegotiated contracts that were generating losses and reengineered the cost structure to accommodate prevailing economic conditions. We worked with the company leadership to eliminate unprofitable product lines, renegotiated vendor debt, and executed on a forbearance agreement with the senior lender. We also solidified a long-term contract with a key customer.

You should always have controls to monitor your product lines, so as to avoid losing money (or too much money) in the first place. Don’t assume because something worked once it will continue to work.

One of our largest vendors (Big Gorilla) was paying every 90 days which was creating huge cash-flow problems. Implementing tighter credit criteria was a must. Consider your credit risk based on who you offer terms to and consider overhauling your system and reducing your risk. We introduced the requirement of collaterals or guarantees when necessary and shortened payment terms for the company’s customers across the board. Though most of our efforts with the company were geared towards creating cash flow, each of the above actions was necessary to ensure the company’s survival.

The Hard Part and the Happily Ever After

Despite the turnaround success and the awards and accolades GGG received for it, there were some expected difficulties. We had to lay off some people, remembering that despite being a tough thing to do, letting some workers go saved the jobs of many others.

As a result of our efforts, the company shifted from a significant loss to positive cash flow after 16 months. The bank debt was significantly reduced, and a new two-year bank loan was executed.

Due to the speed of the turnaround, the bank elected to extend the company’s credit. An important factor in the bank’s continued partnership was that we educated our banker about our turnaround efforts and successes. The bank was happy to maintain a client when it could see the signs of a positive transformation and have open lines of communication. Always make sure you communicate with your bank by following The CEO’s 10 C’s of Borrowing.

Currently the company has an excellent relationship with the bank that includes ongoing and honest communication. In fact, the company completed an acquisition in 2011 and its employees received raises across the board.

Lessons Transcending Industries

This case reinforced for me that 95% of any turnaround is not about specific knowledge regarding any particular widget or industry.

GGG had a lot of construction experience by this time, but only about 5% of the turnaround had to do with construction company issues. The rest had to do with basic blocking and tackling issues: watch your contracts, watch your cost, watch your headcount, negotiate with the bank.

You can hardly learn these important business lessons from a textbook – you learn them from getting the bloody noses that my partners and I got throughout our decades of experience.

How can we learn from this case?

When your numbers start getting soft or you start losing money, be proactive. If the company is highly leveraged, has a decreasing cash cushion and is maxed out on its credit, these are among the signs that it’s time to take more serious action.

None of us has a crystal ball to know exactly how long this current economic downturn will last. If you are seeing problems and intend to survive, restructure sooner.

Be proactive. Be decisive.

If you must let people go, do it in one confident move. If you have multiple layoff weeks or even months apart, you will demoralize your employees who will feel insecure in their positions. As CEO or leader, you need to be aware of the economic reality and act decisively based on them.

Whatever your business, face your harsh reality and be proactive.