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Diagnosing a Troubled Company – Part II ©

Written by: Dennis Gerschick

Article Overview: This article is Part II of a series of articles. It suggests a number of criteria to consider in reviewing a company's financial statements. It also addresses why it is important to properly handle a customer's complaint.

Diagnosing a Troubled Company – Part II ©

Every company is a “troubled company” because every company has problems or issues it must address. “Trouble” is only a matter of degree. Companies that are successful one day do not always remain successful. Well managed companies remain vigilant, always alert for warning signs, and they react quickly when problems arise.

In Part I of this article, I noted that even when problems are identified or become obvious, many people will ignore them for a variety of reasons. I also noted that in diagnosing a company, a good starting point is to have the company do an honest self-assessment. A self assessment involves asking many questions and carefully listening to and interpreting the answers.

Troubled companies may face financial problems, such as a lack of cash flow, too much debt, low margins, etc., and/or operational problems, such as defective manufacturing processes or distribution problems. One problem may lead to another. For example, a lack of cash flow may tempt a company to cut back on its inspections which may then lead to poor quality and defective products. Conversely, late shipments may lead to a loss of business and a lack of cash flow. Is the identified problem the disease or only a symptom?

A company’s financial statements may provide clues. “Big picture” questions that should be addressed include:

1. Is revenue increasing or decreasing? At what rate? Why?

2. Is the company’s gross profit margin and net profit margin increasing or decreasing?

3. What expenses should be cut? Which expenses should be increased?

4. What is the company’s cash flow? Is the cash flow from operations positive? Is cash flow increasing or decreasing? At what rate? Why?

5. Compare the company’s current cash on hand to liabilities due within 30 days, 60 days, 90 days, etc. What can be done to defer payment of cash?

6. Are the company’s accounts receivables growing? Review an aging schedule of the receivables. What can be done to expedite collections?

7. Can any of the company’s assets be sold? Can any be leased or licensed to others?

8. Can the company refinance any debt?

9. Is it possible to raise any new equity capital? If so, on what terms?

10. What can be done to improve the company’s reputation and image?

Albert Einstein defined insanity as doing the same thing and expecting a different result. However, many troubled companies do exactly that. They continue doing what they have been doing thinking that if they are persistent and patient the business will improve. I believe that if you want different results, you have to do things differently. This is not to suggest that a company should act like a fish out of water – flopping about and changing its strategy often. Strategy should not be changed too often but tactics used to implement the strategy can and should be changed or modified to get better results. Management should constantly be asking: What tactics are effective and which ones are not?

In Part I of this article, I noted that a company should solicit input from its customers. Bill Gates has written that when customers complain that is actually a good sign for the company because it indicates the customer has psychologically committed to continue to do business with the company. If the customer decided to go elsewhere for the product or service, they would not waste their time complaining to the company. Customer complaints really provide the company with a roadmap – the customers are telling the company what it should do to better serve them in the future and to enhance the relationship.

Companies should consider several points including: (1) How easily can customers complain to the company? (2) How quickly and effectively does the company respond to the complaint? (3) What attitude does the company express with its response? Is it “the customer is always right,” or is it “if we ignore them maybe they will just go away,” or perhaps “the customer is overly demanding, unrealistic, and really just a pain in our backside.” The key to most businesses is to get repeat business from customers, and to convert customers into the company’s goodwill ambassadors. How companies handle customer complaints is critical to their long term success. Satisfied customers are often a company’s most effective advertising. While a company should strive to minimize the number of dissatisfied customers, it is important is to change unhappy customers into satisfied customers. Does the company do this consistently, most of the time, some of the time, or never?

Here are some additional important points:

1. A company’s CFO and/or its outside CPA should be proactive and alert the company to downward trends or warning signs. Unfortunately, too many CFOs and CPAs do not perform this service because they do not want to be the “bearer of bad news.”

2. Many, if not most, business owners and executives can identify problems. Fewer can explain the true cause of the problem. Even fewer can offer practical solutions. I believe strongly that companies should consider all of their options and the advantages and disadvantages of each one before making a decision. Having outside, independent directors can be a big advantage in this regard.

3. Before deciding which option to implement to solve a problem, many factors should be considered including: (a) the amount of time that will be needed to implement the solution; (b) who, within the company, will be involved and the impact on their other duties; (c) whether the company even has the qualified personnel needed to implement the solution or whether new employees or consultants need to be hired; (d) the cost of implementing the solution in terms of both dollars and other opportunities that cannot be taken advantage of due to monetary restraints; and (e) the effect of the solution on the company’s culture, strategy, branding, etc.

Conclusion

Now, in the summer of 2008, many well known corporations are filing for bankruptcy protection. Many other companies are simply closing their doors. Why did they fail? Why couldn’t they turn their business around? People do not like to do business with troubled companies. Once a company is perceived to be in a downward spiral, customers often go to the company’s competitors and the company’s downward spiral accelerates. It is very difficult to get out of the spiral; if it were easy, everyone would do it. The goal should be to avoid getting into the spiral in the first place – that too is harder to do than it sounds.

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Article Tags: accounts receivables, big picture, cash flow, collections, defective manufacturing, defective products, distribution problems, financial statements, good starting point, gross profit margin, liabilities, manufacturing processes, margins, net profit, operational problems, poor quality, s gross, self assessment, troubled companies, warning signs



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