Turning your company around before it's too late
Why do some companies reach the
brink of failure and rally while others fall off the cliff? Those
that come back from impending ruin usually do so because their owners
realized they were in trouble and quickly acted to turn things around.
"The psychology of being in trouble financially
as a company can be compared to alcoholism," says Fred Zimmerman,
author of The
"There's constant denial that there's a problem,"
Zimmerman says. "People kind of have to hit bottom before they
can make improvements, and sometimes by then it's too late."
Then there are shifting economic factors. During the
roaring '90s, almost any company or concept took off. Businesses
now face a grimmer reality, with many ill equipped to survive.
"A lot of companies looked at business as an
all-you-can-eat buffet," says Marc Kramer, founder of Kramer
Communications, a Downington, Pa.-based marketing communications
firm. "They gorged themselves and all of a sudden they realized
they had eaten all the food."
However, there are preventative measures you can take
to ensure your company never goes hungry.
Business owners first must spot the red flags that signal trouble
Charles J. Bodenstab, author of Information
Breakthrough, recommends finding ways to take your company's
pulse. He's particularly enamored of using technology to gather
information and insight.
For example, Bodenstab was called in to turn around
a failing distributorship. The company was overstocked and had high
overhead just as sales were falling.
"I don't even think the prior owner knew what
was going on," Bodenstab says. "Why? Because he didn't
have the controls in place. He didn't have what I call data discipline,
the knowledge of what was going on in the business. Their reporting
had gotten sloppy and didn't reflect reality."
Zimmerman, a professor of engineering and international
business at the University of St. Thomas in St. Paul, Minn., refers
to this as defective accounting.
"It's when the company's general ledger doesn't
track what the company's managers need to know to realize that the
company is in trouble," Zimmerman says.
Warning signs to heed early
Early attention to signs of trouble is crucial because companies
generally don't get into financial difficulty overnight. It may
seem that way in some cases, but it's actually a slow process.
"They'll figure it out when they can't make payroll
on Friday, but the trouble has started long before," says Duncan
Bourne, a Chicago-based senior associate with Jay Alix & Associates,
a turnaround and restructuring firm.
Some indicators that your company may be headed for
- Declining revenue:
Less cash coming in definitely can mean rough times ahead, Bourne
- Rising expenses coupled
with stagnant or declining revenue: This is a recipe for
a turnaround. Even as your company must pay more for raw materials,
office space and employees, its sales are dropping.
- Increasing inventory:
Another sign that sales have slowed and that your company is heading
for the business shoals.
- Complaining customers:
If it hasn't happened already, dissatisfied customers could soon
translate into lowered sales, Bodenstab says.
- Collection problems:
Customers who aren't paying on time could mean they are unhappy
or they could be in financial trouble themselves. Regardless,
it's not good news for your business.
Don't live in excess
Once you see trouble coming, make operational changes.
Moderation is key. A lot of companies pay dearly for
overexpansion, growing too quickly and watching as overhead soon
exceeds revenue. "The idea is to pace yourself and your company
and grow incrementally," says Kramer, author of Streetwise
Small Business Turnaround.
Moderation can take several forms. First, don't hire
willy-nilly the first time that sales take off. "I sat on the
board of a well-known dot-com, a public company that hired so many
people that they were sitting in the halls with nothing to do,"
Instead, really justify the need for new hires. "Make
sure that they bring in twice or three times the amount of money
that you are paying them," he says.
As you scrutinize the need to add staff, outsource
whenever you can. Kramer advises small businesses to stick to their
core competencies -- what they do for "a living" -- and
outsourcing everything else. For example, if your company is a professional
service firm, hire a computer company to run your IT department.
By outsourcing nonessentials, your company will save
money because it won't be paying for employee benefits or 401(k) contributions.
Plus, you can downscale outsourced operations more easily and faster
than internalized tasks.
Basically, says Kramer, "Try to live below your
Frugal companies that save money on office space,
furniture and other overhead will live to sell another day. Companies
that spend everything as quickly as it comes in will soon be out
of cash and business.
Jenny C. McCune is a contributing
editor based in Montana.
2: Navigating your company's turnaround
-- Posted: Sept. 17, 2001