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 / Winter 2003 / Issue 33(originally published by Booz & Company)


Learning Success from Distress

Because the line between underperformance and crisis is thin, a CEO needs to think like a turnaround artist.

Illustration by Lars Leetaru
In every corporate bankruptcy, there is a moment of recognition. Sitting in an attorney’s conference room in Wilmington the night before a Chapter 11 filing, the chief executive looks over a plate of cold pizza and realizes that 12 months ago, there was a chance to keep this from happening. Selling that sick business, looking for new financing when the company was still creditworthy, questioning the hockey-stick forecast that the senior vice president of sales swore by — something.

Halfway across the country, over an elegant dinner, another CEO congratulates her team on a tremendous acquisition that will please the Street, generate tremendous revenue growth, and ensure her annual bonus. But in her heart she knows she and her team are starting a hard slog in which they will examine every part of the new acquisition to squeeze out incremental cash, to improve sales and service performance, to rebuild employee morale, and more. She knows that there is a thin line between success and failure and that she has only one chance to get this right.

The best CEOs are smart enough to realize that things can get worse and that continuous improvement isn’t a catchphrase — it’s a mentality. That means successful company leaders always have a little bit of the turnaround artist in them. They look for trouble. They are never satisfied with the status quo. They know perfection does not exist. They push for improvement to combat inertia and for transformation to fight competition.

We are a firm of hands-on restructuring and performance-improvement professionals who have guided hundreds of turnarounds and significant improvement programs over 22 years, in industries as different as transportation (Ryder System Inc. and National Car Rental), telecommunications (Unisys), and retailing (the Kmart Corporation). Although it is true that, like every unhappy family, every distressed company is unique, we have found a set of near-inviolable truths that characterize all companies teetering into trouble. Here are five “lessons from distress” that are applicable to any company — the healthy, the underperforming, and the crisis-bound.

Lesson #1: It’s the cash. We have a saying at our firm: “If you’re out of cash and out of credit, you’re out of business.” It seems obvious, but we are continually surprised at how often senior executives and directors are completely unaware of their company’s liquidity position — even if other indicators are pointing to trouble.

A medical device company whose share price had started to plummet engaged our company to collectively serve as interim CEO to stabilize finances, adjust the company’s operating portfolio, and provide a transition from a charismatic leader to a new leadership team. The board assured us the company was healthy, with plenty of liquidity. Instead, the first week we were there, we found the company barely able to make payroll. And the company’s longtime lender had withdrawn a line of credit that might have kept the business afloat.

This story is not unusual. The 1990s saw an unprecedented increase in leverage, as the booming economy encouraged credit risk that in retrospect we know to have been excessive. To avoid such situations, a wise board and skilled management team should have several cash management tools:

  • A 13-week detailed cash flow forecast that is based not on profit-and-loss projections, but on projections of actual receipts and disbursements. This is not something most accounting systems routinely supply, so it requires a change in mind-set as well.
  • A longer-term cash forecast that is based on the P&L and changes in working capital but that also shows major debt and capital expenditure.

Of course, more important than having the tools is using them. In the medical device company’s case, neither the board nor management had been monitoring the cash closely enough to see the problem coming.

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