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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 Turnaround Experience.

"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.

Pay attention
Business owners first must spot the red flags that signal trouble is ahead.

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.

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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 trouble include:

  • Declining revenue: Less cash coming in definitely can mean rough times ahead, Bourne says.
  • 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," Kramer says.

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 means."

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.

Part 2: Navigating your company's turnaround

-- Posted: Sept. 17, 2001

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