The good news is that the savvy small business competitor should have it within his/her grasp to seize the present opportunity of an economy that is truly gathering steam.
The bad news is that some competitors are going to miss the boat and languish in a "turnaround mode." This month, let’s examine some telltale signs, well documented in our TEC archives and native language to professional turnaround experts.
Turnaround situations don’t just happen. They usually occur when a small company seriously miscalculates the cash requirements to support emerging market opportunities during an economic upswing. The first evidence of this miscalculation is a current ratio that is going to pot.
Soon, the ability to utilize credit resources to support the need for increased investment in inventories and growing accounts receivables is akin to a noose tightening ever so slowly but with eventual fatal results. Banks hate this situation because they know that if they give in, their likelihood of making good on extended credit deteriorates with each passing day.
The small business is now clearly caught between a rock and a hard spot, and if it is undercaptilized, as many are, it’s turnaround time to be sure. So what anticipatory steps can a business take to make hey during a period of improving business competitive conditions?
Challenge customers first. Personal CEO-to-CEO meetings with key accounts should focus on fulfillment issues and what the source of that fulfillment will be (in-house or farmed out). Product and service projections should be carefully analyzed on, preferably, a weekly basis. Payment terms should be renegotiated with enticing discounts for early payment. If the customer is not an end-user, then information about the end user fulfillment expectations is also important.
Sales objectives should be highly focused on a key account basis and commissions should be tied to account gross margins, if this is not already the case. A metric to measure regular customer communication, again preferably on a weekly basis, should be in place.
Challenge the supply chain second. Timing inventory procurement to match fulfillment requirements is both an art and a science and requires skillful negotiation. For small companies, this is where the biggest hiccups are found: rapid inventory build and payment with a lapse in receivables management. Welcome to the world of the unwanted credit crunch. Vendors need to be a major part of the communication loop and should be treated no differently than a major customer.
Think of your vendors as the "input," yourself as the "throughput," and your customers as the recipient of the "output." This systems perspective forces attention to the total feedback loop. The key question is what are you doing to reduce vulnerability at each point in the loop?
Challenge your associates third. Seizing opportunities during an upturn usually means "all hands on deck." All employees need to be on the same page. Priorities need to be driven down for everyone to grasp, especially the sense of urgency in their implementation. Obviously, open communication is vital for this process to work. The removal and elimination of any form of "waste" or "white noise" must be a constant reminder.
Inform your financial caregivers fourth. Credit extensions are not popular retrospective moves. A well conceived, hands-on business plan with monthly updates is soul food to a banker. The more you share, the greater the disclosure, the greater is the likelihood of support if you momentarily stumble. After all, your financial caretakers are human, but they are risk managers. People are willing to take risks, but not at the business "slots."
Is this all there is? Not by a long shot. But the work of a turnaround expert is generally pretty straightforward. I asked one of my turnaround friends to briefly describe his approach to the task when the above-mentioned issues have been ignored or mis-managed and he is brought in to do a fix. His reply:
1. Grab the checkbook and grab the cash.
2. Quickly assess the management group. Weed out the nonperformers.
3. Liquidate all nonperfoming assets.
4. Negotiate new terms with suppliers.
5. Shrink the business around its core competencies.
6. Allow no excesses – if it doesn’t contribute to margin, eliminate it.
7. Discreetly put the owner out to pasture.
8. Work with lightening speed.
9. Earn a good fee in the process.
Now folks, this does not sound like a lot of fun to me.
Obviously it is a strategy to stop the bleeding and provide relief for the lendors first, equity or other debt holders second. It is a containment strategy to be sure. It is not all about growth and future prosperity. And even with all of this, I have personally watched a 100-year-old Milwaukee manufacturing company go on the auction block, with the family owners losing everything. They saw it all coming. They just didn’t react. Even the professional turnaround person couldn’t pull it out.
The opportunity for you is now. We are on the upswing not just in Milwaukee, but throughout Wisconsin. I truly hope you can take advantage of it. And until next month, I also truly wish that you don’t need a visit from the turnaround man!
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-821-3340.
May 14, 2004, Small Business Times, Milwaukee, WI
