CEO

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6 Questions to Ask Yourself to Face Your Business’s Harsh Reality, Part 3

For the last two weeks we’ve been discussing the questions you should ask yourself to confront your business’s harsh reality. Read about Part 1 HERE and Part 2 HERE. This week, we’re going to ask ourselves the next two questions your should be asking.

5. Am I protecting the financial integrity of my company during downturns so that I am prepared to profit during better times?

Bad financial times prompt too many managers to take the turtle mentality. Don’t put your head in your shell until things turn up. Take the opportunity to see what is inefficient in your business by eliminating loss leaders and reducing inventory, and increasing marketing and sales expenses in high profit-margin areas. By shoring up problem areas during a downturn, you prepare your company to run lean and mean at all times.

This is not an excuse to avoid monitoring, evolving and preparing during good times, though. Many companies ride the wave of what’s working and worry about problems after the wave crashes on the shore. That’s the wrong approach. As long as you know it’s a wave, you know it will end. Come smoothly onto the shore, long since ready for the next wave. Companies that ignored this advice (not that they asked me) were satellite TV companies and Blockbuster. They both road their waves until they crashed into the shores of cable television and Netflix.

Speaking of crashing, if all of your assets and capital are invested in one area, and a problem occurs, operations will grind to a halt. If you have a Big Gorilla – one client, customer or product that accounts for 25% of more of your sales – you need to rethink what you’re doing. Along these lines, don’t bet the ranch on other opportunities; remain grounded in your decision making. In our experience, Big Gorillas are one of the top five reasons companies experience crises.

As above, consider the advantages of protecting your company’s financial integrity for more profitable times. There are always competitors who have issues, and if you keep cash or credit lines available then you can take advantage of someone else’s mistakes, acquiring new product lines or growing old ones.

6. Do our financial departments have sufficient controls and a fraud awareness policy?

75% of the fraud I discover is from first time offenders. That means the people who ultimately commit the fraud are not those who will come up in criminal background checks. Therefore, when working with your auditor, integrate sufficient checks and balances.

As the CEO you have to have a constant feel for your business financially. Walk the company and manufacturing floors – be hands on. Don’t let your guard down by taking your tie off and lounging in your office. Stay involved.

I once had a BBQ at 1 a.m. for a production crew at a company that ran 24/7. While doing this I discovered a multi-million dollar fraud. Do what would be considered out of the ordinary, and you never know what you’ll find.

One thing I recommend without exception is making your CFO/Controller take a two week vacation once a year. Don’t even let him in the building. Sit at his desk, or have someone else do it, and see what happens. You’ll be surprised every time as you find duplicate expenses, continued payment on cancelled leases or sold equipment, and perhaps personnel that don’t exist.

Conclusion

I hope these 3 posts about the 6 Questions to Ask Yourself to Confront the Harsh Reality of Your Business have been helpful. I’d love to know the answers to any of them if you care to share or questions that you would add to the list and that help you confront your harsh reality. Please share in the comments section below.

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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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What Cheerleaders Can Teach Us about Big Business

 

Last night I did a radio interview (that I’ll post when the podcast becomes available), and I was asked a question that I thought I’d share my answer to with you here.

I was asked about my guiding principle – one that helps me lead my firm and other companies that hire me as their CEO.

My Guiding Principle: Be Proactive, Not Reactive.

I live by this motto, give speeches about it, and I’ve mentioned it here before.

All businesses have problems. Nothing goes as you expect it to. But if you’re proactive in your leadership, decision making and planning then you’ll have the tools, people, and ideas in place to handle much of what comes at you.

On the contrary, if you’re constantly reacting to everything, you’ll never get your feet underneath you long enough to resolve your problems.

I’ve also found that honest communication goes a long way. People try to lead secretly, and that doesn’t work. Yes, leaders run businesses, not committees, but if leaders are honest with those involved, especially key stakeholders like boards, banks and creditors, there is a much greater chance for success.

Ra Ra Ra!!!

My initial turnaround success was a Chapter 11 restructuring at a company called Cheerleader Supply, a $50+ Million revenue business with over 1000 employees. As their name suggests, they made cheerleading uniforms, pompoms, etc., and they sent kids to summer camp to learn how to become cheerleaders.

It was the spirit of Cheerleader Supply that helped get it through Chapter 11 restructuring, and I learned a serious lesson about attitude from them.

Think about football games. When your team is down, the cheerleaders cheer harder – they don’t get dejected. Seeing that attitude – embodied by everyone at Cheerleading Supply – inspired me and allowed me to be the best catalyst for big change that I could be and ultimately brought that company through Chapter 11.

I’ve applied that attitude to everything going forward. To this day I still have a pompom in my office reminding me of this original successful turnaround and the importance of cheering harder and having the right attitude even when things seem their darkest.

What You Can Do

I encourage you to go forward with this attitude, which goes hand and hand with being proactive instead of reactive.

The proactive leader is cheering constantly for his company by saying that nothing is going to stop it from being successful – especially not his own complacency when it seems like he’s up by four touchdowns and can just coast (are we good with the football metaphors?).

Learn from the cheerleaders and be a proactive leader.

What’s your guiding principle? How do you think these notions can help you in your life and business?

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“Good Times, Bad Times, You Know I’ve Had My Share”

If matters go badly now, they will not always be so.

– Horace

Business is cyclical, and the ups and downs are unavoidable. You have limited control over the corporate environment you operate in, and it’s often hard to exert immediate influence even within your own company.

But understanding this should help rather than hurt the way you manage your business affairs.

What you can control is the way you anticipate and react to the circumstances that cause periods of growth and decline. Always be aware of what factors influence the success of your business most strongly, and try not to be too phased when times are tough.

One of the most common mistakes I see amongst leaders of failing companies is that they re-act instead of take a proactive attitude towards their business.

Learn from their mistakes.

Don’t rely on the numbers you’re given. Don’t become complacent. Don’t believe projections. Have contingency plans. Have checks and balances. Face the harsh reality of your situation. Develop alternatives to your primary model and product offerings. Walk the floors of offices and manufacturing facilities.

Take Blockbuster, for example. Since its founding in 1985 until recently, things had been going well for the video and gaming rental giant. The company found a combination of products and services that were in high demand and it grew nationally as a result. But they failed to proactively seek an opportunity like their now main competitor, Netflix.

Now Blockbuster corporate strategists spend most of their time reacting to the evolutions of the movie rental marketplace that Netflix overwhelmingly controls. The company filed for Chapter 11 bankruptcy in September, 2010. Your company, like Blockbuster should have done over the years, needs to keep evolving whether the times are good or bad.

It is true that the biggest battleships are most difficult to turn around, but there isn’t a battleship too big to sink.

Keep Your Business Healthy

There are a few very important things to keep in mind to keep your business afloat and healthy:

1. You need to focus on overcoming the turtle mentality in your company. When things are going  badly, many people have a tendency to try to hide from and ignore the problem. Make sure that through an open communication policy, people feel comfortable sharing their concerns regarding the business. Wouldn’t you rather know if there is a problem that needs your attention while it can still be fixed?

2. Remember, it is not only your own perceptions and attitude you need to manage. Keep a positive attitude even during hard times. People look to you as an example, and they often jump to conclusions based on your behavior. You need to communicate with your colleagues and employees. If the business is in bad shape, be honest, but engage and reassure everyone in the process to make things better. Ask for their ideas and opinions, especially if they are key stakeholders.

Once, acting as CEO at a company with 24 hour operations, I decided to hold a barbecue for those working the night shift. At 1 am, I began cooking on the grill and talking to the team members. As a result, I discovered a multi-million dollar fraud case. Act out of the ordinary and you never know what you’ll find.

No matter how tough things are in the business, you have power. If you take steps to be a proactive leader, keep a policy of open communication with your employees and colleagues and maintain a positive attitude, you will likely land smoothly when a wave comes, rather than crashing onto the beach.

What bad times have you experienced? How did they end?

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Prepare for Change: The Tale of K-Mart the Big Gorilla

Everything changes but change itself.

– John F. Kennedy

Little rings truer to me than this statement by President Kennedy.

I was speaking to a CEO group just last week and I was telling them: change is coming, change is here, change is staying. What does that mean? It means that everything changes but change itself.

Conditions will never remain the same, and as a business person you have to prepared for that. Be ready for the future and be ready for change.

Let me give you an example, that I like to call the Big Gorilla example.

A while back I was CEO of a manufacturing company that made t-shirts and sweatshirts. We did good, steady work, and one day K-Mart came to us and started placing huge regular orders. A big change!

They asked us to change our manufacturing capabilities to suit their needs. We did. Another big change that seemed worth it because they ordered so much so regularly.

Then one day, after we produced a million dollars worth of merchandise branded explicitly for K-Mart, they told us not to ship their order, that they were having some financial issues. That was $1 million of merchandise!

This was unwelcome change, and this is the power of the Big Gorilla. The Big Gorilla changes your customer mix; it changes your business; then it changes its relationship with you.

When K-Mart told me to destroy the merchandise and that I couldn’t sell it anywhere – I just had to eat it – I was pretty perturbed. I, of course, didn’t listen, and sold the merchandise overseas at enough to break even. When K-Mart eventually found out (an executive was vacationing in the area and noticed the locals wearing the merchandise), the company terminated its relationship with us, changing the nature of our business again. We had lost our Big Gorilla.

Two lessons come out of this story. The first is: Be Wary of the Big Gorilla. It’s nice to get a big buyer but when someone controls that much of your customer pie, change is always on the horizon.

And that brings us to the second lesson: Change is the Only Constant. Believe it and prepare for it by staying aware, recognizing that all projections have holes and flawed assumptions, being proactive rather than reactive and having controls in place.

What change has caught you by surprise? How do you prepare for change? Have you ever had a Big Gorilla – what happened?

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Cooking the Books & Other Stuff I’ve Seen Lately

You wouldn’t believe what some people do. Well, I’m sure you would, but I’ve got to say that I’ve been seeing some crazy stuff these days.

In one case I’m working on, the guy “running the show” has been stealing everything but the robe off his cold grandmother.

Every time I think I’ve seen every possible type of fraud there is, I’m introduced to a new one.

So far due to the actions of one crooked CEO I’ve seen and experienced the following:

~ Cooked Books

~ 6 Million Stolen Dollars

~ A self dealing CEO setting up a new business and paying old vendors for support

~ Getting my access cut off internally despite my appointment by a court of law to be doing what I’m doing

~ Offloading merchandise that had “no value” and was therefore disappearing

~ Selling one company’s products through another company and brand, which is detrimental to the value of the original company

~ Literally, taking the cash from sales – taking the cash, like a petty thief!

~ Plans to remove computers and file cabinets to “preserve” records for tax purposes.

~ Destruction of papers and documents

Holy cow!

I can’t believe all that this crooked guy is doing. I’ve seen a ton of fraud in my day, but one person doing so many different things. If he put this much effort into running the business effectively he would surely be making as much. It’s just craziness!

Have you been at a job and experienced fraud? Share your story in the comments below.

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“If the Alligators are Biting, It’s Too Late to Drain the Swamp”

You may have heard this saying before:

“If the alligators are biting it’s too late to drain the swamp.”

Keep this in mind while running your business. Doing so can affect not only profitability but also your very survival.

Here are a few examples of when the alligators start biting:

1. Consider the sales manager who is not producing what you’ve come to expect from him; you notice a decline in sales and even a disruption to the team. He should either be refocused or fired. Now your revenue and profits are down. If he handled your largest accounts and the competition has now stolen them from your company, you’ve been bit by alligators.

2. Your CFO is constantly late with financial statements, and the bank is growing concerned. You then discover after months of frustration that he has personal problems that have affected his performance.  Now the bank is concerned about your ability to run your business. You’ve been bit by alligators.

3. The classic survival story involves fraud. Almost half – thats 50% – of our clients have encountered some kind of fraudulent situation. When the CFO/controller has been systematically stealing, the bank’s knee-jerk reaction can leave you scrambling to find another bank. That’s not so easy in this economic climate. You’ve been bit by alligators, and your company may be devoured.

The key here is to put safe guards in place with the assistance of your auditors. Don’t let the CFO set the testing limits above the limit he’s stealing. Let your auditors run the process. Also, as the CEO or key manager, you should periodically sign every check for a month that would normally be a “one signature” check handled by the CFO/Controller. This control is one great way to start draining the swamp.

How to Avoid Being Bitten by Alligators?

Be proactive instead of reactive. Drain the swamp before the alligators take up residence and start chomping.

As your company grows and you start delegating work, make sure that you keep yourself embedded in enough of the processes to have proper control. Don’t delegate and forget.

If you have auditing processes, don’t stick to limitations (e.g. we’ll look at all transactions over $5000). Mix things up and be unpredictable, so that no one can take advantage of your complacency or your routines.

Ask a lot of questions of your key people. Learn about your cash flow, your payables, and your company’s projections. Don’t believe what you’re told. Follow up on the details and have an auditor check out those projections. That’s prudent business practice.

I’m not suggesting that you don’t trust your CFO or that you don’t believe anyone. I’m just saying you need to question what’s happening and check up on things for yourself.

This may not be draining the swamp, but it is keeping the water level down. This is being proactive – not reactive – and it will always cost you less time and money.

Until next time, don’t get bit by the alligators.

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The CEO’s 10 C’s of Borrowing

Bankers and business owners can have trouble communicating because their mind-sets are different.

As someone who began his career as a banker and who has spent the last 30 years doing interim-CEO turnaround management, I understand the banker’s mindset while having profound insight into what makes businesses run successfully from the top. Most of my day is spent playing “Let’s Make a Deal:” negotiating with lenders, creditors and bankers in order to get CEOs and their businesses new terms that allow continued operations.

In my experience, it’s particularly difficult for these two groups – business leaders and bankers – to understand each other because they’re coming from such different places and have seemingly different priorities.

Part of the process is helping both sides see that they’re in a partnership. Both bankers and business owners want to see the business continue to run because that’s the most likely way for the bank to recoup its loans and eventually see profits, and its the only way that the business will turn from debt to profit.

Thus, as a business owner, you should strive to understand how your banker thinks – and why he thinks that way. This can have a positive effect on your relationship and make it easier to get money when you need it. I present to you, then, “The CEO’s 10 C’s of Borrowing,” which will help you become a better borrower, enhance your relationship with your banker and make money more available when your business needs it most.

1. Character is of the utmost importance to bankers.

Bankers need to know you’ll do the right thing when your company is in distress. If they can’t trust you, they can’t put money in your hands. That doesn’t mean fake good character – it means have and demonstrate good character.

2. Carelessness comes down to poor record keeping.

Carelessness can also hurt your bank by causing it to write-off loans needlessly or even lose its federal loan insurance such as SBA Guarantees. Run your shop well, which includes good book-keeping practices, regular audits, competent comptrollers, and mixing up your monitoring practices. Not being careless also means verifying for yourself the details of your business’s financial situation.

3. Complacency is not an asset.

Banks are interested in how you react to tough situations. Don’t just tell them what you’re legally required to when they ask; keep them updated to avoid surprises. Bankers hate surprises. This is all a part of the larger principle of being proactive rather than reactive. Proactive business owners keep their banks apprised of the situation, which makes their banks more likely not to react to unfortunate circumstances by demanding payment on loans.

4. Contingency Plans are key for orderly succession if something happens to you.

Bankers value stability, and even though many business owners think they’re invincible, history has proven otherwise. If your bank knows what will happen in the event that something bad happens to you – like disability or death (God forbid) – that’s comforting to them. If they know what will happen to your business in the event of various catastrophes, they’ll continue to work with subsequent leadership. It’s also wise to introduce your banker to the future generation of leaders at your company. Have contingency plans. Nothing works out like your spreadsheets suggest.

5. Capital is your net worth (assets minus liabilities).

Bankers want an extra cushion of equity so they can be more flexible with your company in case it has a bad year. A CEO and a banker need to balance one another’s needs in order to maintain sufficient capital. I sometimes find that telling entrepreneurs, owners and CEOs to keep extra capital around is like telling a dog to save part of his dinner for later, but if you can show your banker that you’re capital-wise, he’ll be more likely not to call your loan after a bad year.

6. Collateral is a bank’s leverage and makes bankers feel more comfortable.

Collateral does not repay a loan, as many entrepreneurs think when they pledge their assets, but again, it does ease the banker’s mind.

7. Capacity is your ability to repay.

Bankers check to see if you have champagne tastes but a beer wallet. If you seem like you can repay what you’re asking for – which is to say, a reasonable sum and not your dream loan – you’re more likely to see the money. Shoot for the stars in life, but a bank loan is a different matter.

8. Competition works to your advantage.

Banks are concerned about their competitors’ interest rates, collateral packages and guarantees. You can use this to your advantage by doing your homework when seeking a loan and making that clear to your banker (though no one likes to feel threatened, so be courteous about this). Knowing about your bank’s competition can also let you prepare for a quick capital search should your banker pull out.

9. Controls are your built-in monitors.

Bankers want to know about your company’s controls. Do you have checks and balances for payroll clerks, controllers, CFOs, and inventory personnel? Do you watch the back door? Outline the steps you take in your plans and conversations with your banker; ask for his recommendations. If you find an issue, correct it and then update your banker that you’ve fixed the problem.

10. Communication is essential.

Almost every one of these tips hinges on communication. Don’t keep things from your banker. If he knows what’s happening he can work with you instead of against you. Work with your banker for the best relationship.

With “The CEO’s 10 C’s of Borrowing” in mind you’ll be better equipped to understand where your banker is coming from and not get frustrated when things don’t seem to go your way. Talk with your banker and try to understand him. It will only be to the benefit of your business.

Which of these have you found useful or true in your experience? Let us know in the comments.

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I’m Lee N. Katz and It’s Nice to Meet You

Allow Me to Introduce Myself

My name is Lee N. Katz, and I’ve specialized in turning companies around for more than 25 years. In 1986, I joined Grisanti, Galef & Goldress (GGG), one of the oldest turnaround consulting firms in the United States. In 1997, I became the managing partner.

Throughout my career in crisis management, I’ve served as an interim executive officer and reorganization director for both large and small companies, public and private, with annual revenues from $5 million up to $3 billion. In addition to offering expert-witness testimony regarding business valuations, turnarounds, and plan feasibilities, and I’ve served on court-appointed federal and state receiverships.

I love using my skills to help owners, CEOs and boards of directors prevent crises from happening, but no one ever seems to know a crisis is happening before the roof gets blown off the barn. And that’s when I step in.

In the 70s I worked for First National Bank of Atlanta, eventually directing their asset-based lending in the Atlanta area. I’ve also spent quite a bit of time developing and managing commercial real estate for end users like Wal-Mart, John Wieland Homes, and other private investor groups.  I’ve renegotiated more than $1 billion in real estate leases and handled numerous environmental issues for real estate and corporate manufacturing clients. Sometimes I do this in cooperation with state and national Environmental Protection Agency authorities.

I often serve as a financial advisor to individuals and trusts.

Specialties

People often ask me what I specialize in, so I thought I’d toss the short list your way:

  • Financial Restructuring
  • Bankruptcy and Bankruptcy Restructuring
  • Real Estate Receiverships, both Federal and State
  • Operating Company Receiverships, both Federal and State
  • Restructuring Bank Debt with the FDIC and Successor Banks
  • Asset Liquidations
  • Alternative Restructures to Bankruptcy
  • FDIC Negotiations
  • Corporate Due Diligence
  • Bond Restructuring
  • Financial Advising to Bond Funds
  • Corporate Downsizing

Some Public Recognition

For those of you who are kind enough to be interested, my firm, GGG, has been recognized by the Turnaround Management Association’s (TMA) Atlanta Chapter:

• 2008 Small Company Turnaround of the Year Benton-Ga, Inc. Learn More
• 2004 Non-Profit Company Turnaround of the Year – Life University Inc. Learn More
• 2003 Large Company Turnaround of the Year – P.S. Energy Corp.
• 2002 Large Company Turnaround of the Year – Wyncom Inc. Learn More

So, that’s a bit about me.

Now you know who’s writing this blog. If you have any questions about these things or if there’s anything general that I can answer for you, please don’t hesitate to ask in the comments.