Turnarounds for Distressed Companies

Let's hope your organization doesn't find itself in a distressed situation. However, the first step is to recognize the early warning signs of financial distress. They include:

  • Escalating inventory levels.
  • Cash balances are relatively low.
  • Some payables are paid 15 days late.
  • Sales margins have dropped.
  • Production has become inefficient and requires improvement.
  • The Bank has called and asked for recent financials and additional information.

If you fail to take corrective action, than serious symptoms will occur:

  • Cash balances are dangerously low.
  • Checks are overdrawn at the Bank.
  • Vendor payments are extremely late.
  • You can barely make payroll.
  • Layoffs have started.
  • Employee morale is falling.
  • Some of the better people are beginning to resign.
  • Creditors and banks are requesting meetings.

When you reach serious levels of distress, you will be forced to implement a Turnaround Plan. The single biggest source of financial distress is by far due to bad management. So a change in management is critical within a Turnaround Plan. Bring in new partners, outside consultants, or someone who can think differently; someone NEW has got to enter into the picture! A second component of a Turnaround Plan is restructuring your organization so it can survive for the next 90 to 120 days. This requires extreme cost cutting, immediate liquidation of assets, and negotiating new terms on outstanding debts.

Next you will need to determine if the organization has a "going concern value" in excess of its liquidation value. Can your organization reorganize and generate values in excess of the values from selling off all of your assets? If yes, than you need to implement a long-term reorganization plan. If you are unable to reorganize and you can't meet your obligations, than you may have to consider Chapter 11 bankruptcy. However, voluntary reorganizations are preferred over Chapter 11. Finally, recognize the sources of organizational distress. They include bad management, inability to compete, too much debt, under capitalization, and lack of innovation.

Written by: Matt H. Evans, CPA, CMA, CFM | Email: matt@exinfm.com | Phone: 1-877-807-8756

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