Strategic Management to Avoid Distress
The negative impact of the 2008 financial market decline and the 2008 and 2009 recession pushed many entrepreneurial controlled companies’ into the “zone of insolvency.” Although no clear test exists to establish when any company has entered the state of distress, the determination involves a combination of legal and financial tests. Let us not quibble over when a company entered the zone, a violation or close to violation of financial default covenants clearly indicates the company is in trouble.
For many entrepreneurs, access to working capital and permanent capital through traditional channels is extremely difficult, such as commercial loans, asset-based lending facilities, leasing, or private equity. The challenge is the ability to finance investments in new technology, facility infrastructure, and new products and/or services, which are essential to thrive even in difficult times. The restoration of the balance sheets will be required. This will be neither an easy nor quick journey. To source new investments, other companies whose financial conditions are much stronger may face similar difficulties in raising fresh capital.
The response to this slow economic recovery depends on the specific financial circumstances of each company, basically the organization’s financial position (the balance sheet). While many entrepreneurs are embarking on a journey to restore their company’s balance sheets, others—including many who are enjoying their best financial performance in recent years—are playing offense by opportunistically acquiring distressed assets and investing in markets where competitors are struggling to keep pace on access, service and quality. Still others are attempting to follow a “sustainable bet” strategy by leveraging areas of excellence that positions their companies for long-term financial viability.
Leveraging turnaround strategies are more important than ever to consider. While the sense of urgency is greatest among those companies operating in the distress turnaround strategies are applicable to all entrepreneurs irrespective of their current financial condition. Following the status quo of all business models must be challenged and companies, whether small or large, should reassess their strategies for continuing relevance and likelihood of facilitating sustainable financial performance.
Implementing dramatic changes in operations, financing, service and product lines, and people will be essential, including innovation, to sustaining financial performance and mission-driven success.
The Entrepreneur Distress Avoidance Journey
Business owners should start the task of accelerating their financial recovery by assessing their companies’ situation and objectively answering some tough questions:
Once these answers are explored and known will the entrepreneur, the management team and the employees understand the magnitude of the change required to position the company for sustainable financial success. Clarity on the requirements for success will begin to form and a picture should emerge about the level and manner of change needed in the way the enterprise operates.
Financial restructuring mandates rethinking the usual turnaround strategies. Taking a comprehensive perspective and approach to creating and implementing turnaround solutions should be done, beyond just concentrating on financial tactics i.e., debt modifications. Know that not all turnaround strategies fit all, however each strategy has its own merits for consideration. Keep an open mind and willingness to reject the status quo. For a company’s financial position to be restructured to levels expected by creditors, a serious evaluation of the turnaround strategy should be undertaken. The following are some potential turnaround strategies for consideration. Some are tested while others may not be frequently implemented and as you shall see others may be more innovative and emerging.
While the restructuring should not be limited to financing tactics, companies should vigorously pursue certain financing strategies. In a turnaround, all areas of the business should be evaluated as a potential source of capital. One area is working capital. Reviewing the payroll cycle. If the company is on a weekly payroll cycle change it to a bi-monthly cycle. This lessens the financial burden of financing payroll. Leverage certain assets as sources of capital such as receivables, inventories, and other unencumbered assets. Keep in mind fixed and certain intangible assets such as patents and trademarks. Historical precedent should not hamper the search for unencumbered resources.
Think “outside of the box”. Value exists all around the company. Recognize its existence and capitalize on its potential. The emerging Capital can be sourced from all assets, both tangible and intangible. Stated otherwise, all assets should be in play as a potential source of generating fresh capital.
The Way Forward
The financially distressed or at-risk companies must consider a planning process that will achieve consensus on the company’s baseline financial performance given current environmental factors and strategic priorities. This baseline should identify capital deficits and gaps in performance compared with credit market financial benchmarks.
Next, the company must develop a set of tactical options, encompassing the vital strategies to work toward achieving sustainable financial performance. Utilizing scenario planning with a combinations of options as well as varying assumptions responsive to key planning variables will enhance the decision making process.
Finally, a strategy map, based on the results of the scenarios, should be developed to return the company to sustainable financial performance. The strategy map must address the risks, related critical success factors and key performance indices (KPIs) to achieving the improved financial performance. This will form the basis for the development of change management strategies, including a communication plan.
Sustaining for the Future
Question the sustainability of a strategy is always critical. Action is most important:
Crisis or Opportunity
While the financial crisis and recession impaired the financial condition of many entrepreneurial controlled companies, it created the opportunity to step back and rethink the business model. The disruption in the financial markets and bank’s unwillingness to lend also made it imperative to be able to access credit on the strength of the organization’s own creditworthiness. This is the time to embark on a journey of financial restructuring. Unfortunately this will take time and patience, but the turnaround can be accomplished. The old saying of “no margin, no mission” is now “no financial strength, no access to capital.” These strategies can help achieve the financial strength necessary to be able to access to fresh capital, which will make it possible to fund investments as a means of achieving sustainable financial performance.
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