In the News

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Avoid America’s Bankruptcy by Bringing a Turnaround Guy to Washington and Treating the Country Like a Business

This article was published in its original form in the Atlanta Business Chronicle here.

The United States is a capitalistic society, so I often wonder why the government isn’t run like a business. We had a surplus 12 years ago, but now our debt is astronomical: nearly 14 and a half trillion dollars. This isn’t a political issue. It’s a business one – or at least it should be.

When a business finds itself in this much debt relative to its capacity to repay, the bank, Board of Directors or shareholders say, “No more!” and send in a turnaround professional. We are the shareholders, and it’s time to send a turnaround guy to D.C.

When my clients have problems with cash flow they don’t print money. They raise money, close plants, layoff people or cut spending; they tighten their belts to survive.

Despite insurmountable debt, the U.S. government isn’t doing those things. Businesses with negative cash flow would have been bought, liquidated, merged or otherwise gone at this point, and I don’t want to see us become like Greece or Iceland in five years. Worse still, I don’t want to be a part of the United States of China, since in the business world a company with increasing debt is subject to acquisition or dissolution by a larger and wealthier business.

I always say that 100% of spreadsheets and projections don’t work because the assumptions are wrong, yet people rarely revisit and alter the assumptions regularly to produce more positive results. Even today, the Office of Management and Budget, which hasn’t made an accurate P&L projection in years, thinks that our revenue is going to increase by x if we do a, b and c. But x is an assumption that’s based on the unlikely actualization of a, b and c, possible only if we overcome party politics. And as the deficit skyrockets, the assumptions are increasingly wrong and the parties are increasingly polarized.

The only way we’re going to resolve our financial crisis is by treating the government like a business.

As we repeatedly hear, a balanced budget is the first step. The second step, however, is a repayment plan of our foreign debt. Next, raise taxes. No one likes tax increases – especially me – but it’s part of the solution.

The corporate amnesty program allowed businesses to return profits from foreign soil to the U.S. at lower tax rates, which created more jobs in America. This was a wonderful and creative idea, but it equates to peeing in an ocean: it doesn’t change the levels. While thousands of these ideas will amount to an aggregated long-tail effect, we need to begin with more drastic measures.

Turnaround 101 dictates that we start by slashing all spending by at least 15%. We must tell every division, department and agency that it needs to cut its cash needs – no exceptions. The pain will be shared across the whole country as it would be across an entire business. This kind of mandatory budget cut provides time to fine tune operational requirements based on the improved results.

Before you ask, this 15% cut would affect entitlements, social security, health care, the military, and education – everything.

It’s easy to buck and cry, What about the children? Shouldn’t they be exempt from budgetary cuts? What about the sick and the poor? What about defense?

Here’s what I ask every department at a business: “Do you want your company to survive until tomorrow or do you want to quibble about who’s more deserving of money that doesn’t exist? I don’t care how you do it. Just do it.”

Internal politics kill companies in the private sector because politics and business don’t mix. Similarly, politics has no place in America’s budgetary discussions, and our issues must be addressed by those who can truly set aside political or personal biases and run this country like a turnaround professional in the private sector.

As a turnaround guy, I act like an ER doctor; my first step is to stabilize the patient and prevent shock. As a country, we’re already in shock. Nobody wants to lose an arm or a leg, but if there’s only enough blood for the torso and the leg is gangrenous, you better believe I’ll lop it off to save the body. In five years, the prosthetic surgeon can make us pretty again. I’m in a unique business, but it’s the business of making sure we’re still alive in 2025 with or without a leg.

In addition to the 15% cut, we must freeze all raises and expansions. That means no more foreign aid increases (also subject to the 15% cut), and we put a reasonable mandatory repayment plan in place for foreign aid. We can’t continue to write off receivables and survive. It doesn’t work that way in business, and it can’t work that way in government.

This also means no cost of living increases for government employees, social security beneficiaries and pensioners. In addition, congressmen can enjoy normal health care services – not VIP lifetime benefits for two years of service.

Unfortunately, tenured positions can’t be affected, but we can stop giving tenure. All rules for entitlements (e.g. pensions) must be reviewed. The private sector has largely eliminated pensions because it can’t afford them, and government needs to do the same. In capitalism when you can’t afford something you stop doing it.

I don’t have every last answer for how to save the trillions we need, but by making – and enforcing – these tough moves we can save America from bankruptcy, collapse and ruin. We must empower people to save money, and punish them for spending it needlessly in order to get a line item the following year.

Legislators keep asking that we have faith. Our economic stability has been built on faith: full faith and credit in the U.S. We can’t retain faith after twelve years of increasing debt. We need to deal with hard facts and run America like a business. Business is not about faith. It’s about trusting what works, and what works in business is what I know. Treat America like a business, and we’ll all live to buy another day.

I’m the Turnaround Authority and my bags are packed. Washington D.C., please call!

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A Model for Buy-in from Burkina Faso

Diebedo Francis Kere from Gando, Burkina Faso is from one of the world’s poorest countries. His country has few, if any, natural resources, and temperatures regularly rise to over 100 degrees fahrenheit. Needless to say, life wasn’t going to be easy for Biebedo or his compatriots.

But when I read a story about him recently, I thought to myself that this man knows some important things about business, and with that kind of knowledge, he’ll go far.

The Value of a Good Education

As a child, Diebedo was allowed to go to school – a rare privilege for someone in his position – and during his secondary education he showed an early predilection for architecture. Upon receiving a scholarship, Diebedo was sent to Europe where he received a top notch architectural education.

But something was missing. Diebedo wanted to help his people and improve their lives. He had seen so much more of the world than they would ever know, and what brought him all that privilege was education. He wanted to educate the children from his home town.

When we think about education in America, we consider issues like teacher qualifications, violence in public schools and if our children’s school lunches have too many calories. As you can imagine, these are not the problems of schools in Burkina Faso.

In Burkina Faso, there aren’t even enough buildings in which to learn – or enough calories to eat – to even begin thinking about these problems.

School House Rocks

And that’s where Diebedo came in. He wanted to construct a school house. The problem is that he had learned how to build large buildings with the most advanced technology. His village, however, had no technology. They had two things: mud and people.

And it’s with these two things that Diebedo constructed his school. But he was missing the catalyst that would make the mud and people unite: buy-in.

In order to get his village to harness its collective man power in favor of building a school, he had to convince them of the benefits of doing so, both for the education of the children and the future of the village as a model to follow. What’s more, the elders needed to believe that this was the right decision.

Diebedo knew that without their consent – their buy-in – his school wouldn’t go anywhere. It would be a flop. No one would attend. No one would teach there. The architectural nuances he planned would get muddled, and he would be hated for the waste and disappointment he created.

So he got buy-in.

And it worked.

The success has been tremendous thus far, and things are only improving as this model is being exported across Burkina Faso.

Getting buy-in from key stakeholders is supremely important. I do it. Diebedo did it. You should do it.

How do you seek buy-in from key stakeholders?

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The Real Estate Market Will Recover in October – Just Don’t Ask Me Which October, a guest post by Vic Taglia

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

A realtor called me today about selling my house in Florida. My neighbor sold his in a short sale for less than half of what he paid four years ago. The realtor told me that new owners of the development will be starting construction at much lower prices, so now may be the time to sell, before the supply increases. The new owners of my development bought the property (with the big name designer golf course, club house, fitness center, tennis courts, pool—you get the picture) out of bankruptcy about 18 months ago.

I spoke with the Property Appraisers of two Florida counties in the past few weeks and they see continuing declines in property values across the board—commercial, residential, industrial, raw land, etc. They have advised their Boards of County Commissioners to prepare for continuing declines in real estate taxes.

Last year we sold an office and warehouse building to an end user. I asked the banker who financed the deal if his big bank was now making real estate loans (I was looking for some good news). He laughed and said this particular deal got done only with SBA guarantees and the personal wealth and guarantee of the buyer’s owner.

I talked with an accountant who tells me his wife is now working for a big auctioneer. “They had their best year ever last year—over 250 auctions,” he said.  They have so many properties to auction, many are held on line.

I have also talked with real estate brokers and appraisers who report the same thing: Real estate in Florida continues to decline in value and they don’t see any recovery on the horizon.

I spoke with a client last week who told me he is selling his 65 foot two story motor yacht (with an elevator, no less).

“I thought you loved that boat,” I said.

He responded, “I do, but I want to buy some 100 acres of land nearby to play with on the weekend.  This land will appreciate in value, my boat won’t. And, besides, I want the cash.”

This is from an entrepreneur whose business generates over a million dollars of cash every year and who has bankers making appointments to try to lend him money.

Another accountant friend sold his house three months ago and moved to a rental house on the water. He reduced the rent 20% by paying a year in advance. He is using the capital from his home to purchase and flip foreclosures.

Wednesday is real estate day in the The Wall Street Journal. It used to be fun to see all the fancy resorts, big condo buildings, ranches, etc. with full page ads. Now the ads are one sixteenth of a page with headlines such as Bankruptcy Court Ordered, Absolute Auction, FDIC Owned Property, etc. Sometimes these are the same properties I saw six years ago.

Land is close to free in my part of Florida and elsewhere, and construction costs are the lowest in decades. I am not shilling for Florida real estate (I can, however, offer you a great deal in a wonderful golf course community outside Tampa), but I want to draw your attention to some hard facts.

1.  Land in many places has reached values unseen in decades.

2.  There is no recovery in sight.

3.  There are bargains to be had for long-term cash buyers.

4.  Owners are reaching their limits of endurance; they are becoming motivated sellers.

5.  And Cash is King, now and forever.

What does your real estate situation look like? Does it confirm or counter this picture?

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For Fraud Prevention Month, Prevent Some Fraud

March is Fraud Prevention Month, and as far as I’m concerned, that’s a great thing to spread awareness about.

I see fraud all the time. Here’s one of my more recent forays.

So Much Fraud. So Little Time.

In my experience, 75% of fraud is committed by people who have never been caught before. That means the person or people in your business who are likely to commit fraud are not going to come up when you do criminal background checks.

Oh, and don’t forget about family. Family members commit fraud all the time. When you employ family, resentment could lead to stealing, and there’s always a certain sense of entitlement that facilitates matters.

I’ve even seen a CFO who was stealing methodically, and when I looked back I saw that his father had been the previous CFO who was stealing methodically in the exact same way.

Stupid Fraud

Most of the fraud I see is idiotic.

I’ve seen people with folders on their desktops that may as well have been labeled fraud. When I opened the folder there was a spreadsheet inside with every single perpetration.

I’ve seen a CEO who had the account statements from his bank in the Grand Cayman Islands sent right to the office.

I’ve seen a woman who everybody loved and who worked as the payroll processor at a company for 25 years check out of the hospital 24 hours after a heart attack only to process payroll and return to the hospital hours later. She never missed a payroll in 25 years. And as it turns out, neither did the three fake employees she had on the books whose social security cards and accounts she controlled.

And people love to spill the beans. I’ve had people shove USB keys filled with data and file folders and so much more under the door of my hotel room in the middle of the night.

How Do You Minimize and Catch Fraud

Be out of the ordinary.

Fraud happens when complacency abounds. People steal a little, maybe even by accident, and realize that no one was looking, noticed, said anything or seemed to care. So they took a little more. And then a little more. So mix things up.

As I’ve mentioned in another post, I once caught a multi-million dollar fraud by holding a BBQ at 1 a.m. for a 24 hour overnight crew. A guy came up and just told me about something that didn’t make a lot of sense to him. I only caught the fraud by doing something out of the ordinary. When’s your next late night BBQ scheduled for?

Always force your CFO to take an annual two week vacation in which he’s not allowed in the building and he’s cut off from business email. Sit at his desk and do his job, and you’ll be amazed at what you find.

Fraud also happens by working outside the known bounds of your auditors’ checks. If auditors only look at transactions above the set limit of $5000, then once every few months check everything below $5000 also – that’s where all of the fraudulent checks will be. You’ll discover that you’re still paying for leased equipment you’ve long since sold or that you’re paying rent on property you no longer own.

You’ll find all kinds of things. Just do what’s out of the ordinary.

Help prevent fraud in your company and raise awareness of fraud during Fraud Prevention Month and every month hereafter.

What kind of fraud have you found?

P.S. If the answer was none, you’re not looking hard enough.

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The New Norm is Becoming the Norm

How long is something new before it just starts being the status quo?

It’s been three years that our economy has been like this. I predict another 5-7, which could get stretched out to 10 years before we get back to a pre-2007 economic climate.

I’ve been saying for a while that we’re headed for another recession and that the economy is going to be flat for the next 5-7 years. By definition we can’t have a double-dip because we’ve had two quarters of growth.

But we keep getting held back from further recovery due to our own folly and the interconnectedness of the world economies.

The stock market has dropped 3.5%, giving up all of its upside for 2011, and no one could predict the tsunamis or the nuclear fallout in Japan. Another episode in Europe or elsewhere could put the U.S. right back on its butt (if we haven’t already tripped and we’re just in that pre-getting it state before we wind up on our butts).

If you read the papers in the last couple of days, you heard that the knocked-out power-plants that were supposedly controlling only 5% of of Tokyo were actually controlling as much as 25% of the electricity in Tokyo. This has slowed and will continue to slow Japanese manufacturing and business dramatically. Due to the Japanese “just in time” inventory method that most modern businesses have gone to in the last 15-20 years, Japanese auto makers in the US and others in the manufacturing sector are going to be slowed down. This will only further exacerbate our own recovery.

Who knows how far the Japanese market will go down at this point, and the more problems that arise the more this market will spiral. This will affect us.

Why am I throwing all of this out? No, I don’t like dread and doom. I like facing reality, and I’m sharing this because the recovery is going to get stretched out more and more and problems compound problems.

So what do you need to do? You need to prepare yourself and your business for this situation.

It can be hard to change because change is hard. But you need to look at what you can change to be proactive, even if something’s been working for 20 years. It may not need to be the product itself, but it may need to be your manufacturing processes or something else that let’s you stay ahead of this curve.

Separate the emotions, and look for practical solutions.

And beware the alligators. They may already be chomping.

What do you predict for the economy in years to come? How soon will a full recovery be in effect?