harsh reality

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Living the Lessons of Turnaround Success

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.

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“Know Thyself” and Know Thy Weaknesses, Too

Growth begins when we start to accept our own weakness.

  • Jean Vanier

There’s little I find as useful in business as knowing my weaknesses. This applies to me as a person just as it applies to my business, GGG, and any business that I am leading or involved in.

It is in weaknesses that I find opportunities for growth or increased stability and future success.

As a human being, my partner in life – my wife – makes me a better person. I know my weaknesses, and I know that with and because of her, I will grow into a stronger person. I like to flatter myself by imagining that she feels the same about me, and that many healthy, enduring and strong relationships include this dynamic.

As a business leader, I find that it is best to surround myself with those who can do what I cannot. Whenever Grisanti, Galef & Goldress brings on a new associate or partner, we ensure that this person has skill sets and areas of expertise that are outside of what we already know, do and provide. In that way, our business and its services grow and evolve and we get stronger as a company.

Successfully bringing on someone who fits this bill begins with understanding our weaknesses as a company.

Similarly, when I am brought in to lead another company, I want to know where the weaknesses are. Considering the crisis situation a company is in when I’m brought on, no doubt the immediate weaknesses are apparent to me – as they are to others. However, it’s an analysis of everywhere else that the company is weak – and therefore vulnerable – that allows me to start shoring up those holes and preventing further and future catastrophe.

For instance, if I’m brought in to manage a cash crisis, but discover that a company’s key products have not evolved in two decades and are now competing in a saturated market, that’s a weakness that needs to be addressed and is no doubt linked to the cash crisis – or will be one day. If I learn that we have a Big Gorilla as a client, then I’m going to see how that potential crisis can be mitigated early as well. It’s knowing these weaknesses that help with current problems and stave off future ones.

Knowing your weaknesses allows you to address them and grow as a person, company and business leader. Face the harsh reality.

Want to learn the kinds of questions you should be asking yourself to face your harsh reality and learn where your weaknesses might be? Then read my 3 Part series (Part 1, Part 2, Part 3) and find out!

What are your weaknesses? How do you plan to deal with them?

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6 Questions to Ask Yourself to Face Your Business’s Harsh Reality, Part 2

Last week we discussed the first 2 questions you should ask yourself to confront your business’s harsh reality, which you can read about HERE. This week, we’re going to ask ourselves the next two questions your should be asking.

3. Am I leading by example and delegating to the right people?

Employees follow the example of a company’s leadership. A huge part of being a good leader is knowing how to share responsibility and credit, and ensure that your managers are setting good examples for those who work with them.

All CEOs have egos. How they survive a troubled situation depends not only on their work ethic and ability to set those egos aside, but also the perception by others of these factors. If employees see you put cash straight from the register into your pocket, they will consider that acceptable. If they hear you bad mouthing clients and customers, they will consider that the company’s attitude – and follow suit.

Part of leading by example and delegating is recognizing that, at some point, all entrepreneurs need to either hire a professional manager or become a professional manager in order to reach the next level of success. Typically, entrepreneurs that don’t make this leap are those who ultimately call upon turnaround management professionals.

4. Am I constantly reacting to business issues, or am I being proactive to minimize problems?

Being a reactive business manager won’t work in the long run. You’ll be distracted and putting out fires rather than creating value. You need to be proactive about your product line, financial state, management challenges and business. If you see obsolescence of your main product line and don’t look for substitutes in order to stay profitable, then you’re not a good manager.

Consider the case of General Motors. They allowed their car lines to get stodgy and produced something the consumer didn’t want. Rather than proactively changing the way things were being done at GM, the company didn’t face the harsh reality of its situation and reacted by filing bankruptcy.

On the other hand, there’s Apple. They evolved their product line even before they saw obsolescence with existing products. They invest heavily in R&D, a very proactive approach.

Be proactive – not reactive.

Get ready for next week, when we’ll learn the final 2 Questions we should be asking ourselves in order to face the harsh realities of our business’s situation. Until then, share the kinds of questions you ask yourself about your business in the comments below.

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What Texas Hold ‘Em Can Teach You about Business

All business proceeds on beliefs, or judgement of probabilities, and not on certainties.

  • Charles W. Eliot

If that isn’t the truth, I don’t know what is. My business is driven by businesses that believe that business is certain.

Business is Not Certain

I won’t go so far as to say that business is a gamble, because business is no roulette wheel. Roulette is entirely a game of probability. And when you add 0 and 00 onto the wheel it becomes probability that’s stacked against you every time.

Business is more like poker. You know what’s in your hand (King-4 suited, let’s say), and that hand is playable.

As the game proceeds and cards come out, you have a better idea of the conditions, like your assets, customer base, and so forth.

However, there are also things you can’t affect – though you can make educated predictions – like what’s in your opponent’s hand. In business that would translate to prevailing market conditions, natural disasters that disrupt supply lines (can anyone say Japanese Tsunami?), and so on.

Beliefs, Judgments & Probabilities

People who play poker purely based on the mathematics believe that, if they look at and comprehend everything on the table and what their opponents could be holding, poker is a game of probability.

However those who play Hold ‘Em know that they also have to follow their guts and use their instincts, taking subtle clues from the situation around them. How long did their opponent take to check, bet or raise? What was that raise and how does it compare to the blinds and the pot? Did you perceive a tell and are you sure that is his tell? What’s the pot at? Is he bluffing? Should I bluff?

The answers to all of these questions are, to some degree, unknowns, and our opponents are thinking comparable things (remember, in the analogy, poker opponents aren’t our business competitors – they’re larger issues we don’t know a lot about).

It is due to these questions, our gut feelings about their combination of possibilities and effects, and sheer probability, that we make decisions and act, both in poker and in business.

The Illusion of Certainty

Nothing is certain because we don’t know beyond a shadow of a doubt what’s in another person’s hand.

When businesses make spreadsheets and predictions, they fail to understand that they haven’t accounted for everything. There are unknowns and spreadsheets are based on assumptions. Spreadsheets are almost always wrong. And try as we might to act based on spreadsheets and these assumptions, an opponent’s better hand is still going to beat us.

But if you’re a good player, and you consider as much as you can, and act in accord with what you’ve considered – and you face your harsh reality (i.e. what’s in your pocket and what comes out on the table as it comes) – then you can act intelligently.

If you lose a hand – and you will – that’s okay. As long as there are still chips in your stack – which we’ll call your contingency plans, something every business should have – you’ve made it to fight another day, and play another hand.

Summary

Remember, the business lesson to learn from Texas Hold ‘Em is that nothing is certain in business. As Charles Eliot says, everything is based on belief, judgment and probability. It’s understanding that fact, and acting based on it and those beliefs, judgments and probabilities, that will make you a good business leader.

And don’t forget, you only get knocked out of Texas Hold ‘Em when you go all in.

Do you play poker? How do you apply it’s lessons to business? What other games in life help you learn about business?