Regional Turnaround Management Conference

Last week I attended the Turnaround Management Associations' regional conference in San Antonio. Several interesting trends and comments were made. The most enlightening were from an economist, Don Reynolds, out of Fort Worth. If you ever get a chance to hear him, do so! He is very entertaining and filled with common sense. Some of his predictions were as follows:

- The recession (yes, we are in a recession) will last longer than people think. Most probably 12 - 15 months vs the 6 months that is being tossed around.

- Housing has yet to see the 2nd shoe fall

- same for the credit card markets. Their next!

- There is a major de-leveraging of risk going on in the global markets which will take 5 years to work out of the systems. Presently, we are 2 1/2 years into the cycle.

-Underwriting standards at banks are going up. (Even in Houston, Texas!)

- Finally, there is a commodity bubble that will have to be dealt with.


You would think that in the middle of oil country everyone would be optimistic. However, the mood would best be described as nervous. We all know that the world is a global market. If everyone has a cold chances are you will too.

What Happens if the Lenders of Last Resort are Gone?

On Friday of last week the Wall Street Journal had two articles, one on the front page and the other in the Money section, that taken together paint a chilling picture for the small and mid market companies. The front page article highlights the peril that local banks are in because of home builder loans. The jest of the article is that banks are going to have to cut back on their loans because of losses sustained by lending to home builders.

The other article highlights the plight of CIT. CIT is often a lender to companies whose bank has asked them to move their loan or are having financial difficulties. (By the way, I have had clients do business with CIT and have had excellent results. I can't say enough good things about the company.) There are numerous small companies like CIT in the market place who perform a vital function in providing liquidity to financially stressed companies.

The question is where do the asset based lenders get their money from? The answer is: banks! Often an asset based company or a factorer will leverage investors' money with a bank line of credit. In times of easy liquidity in the market place this business model works fine. But what is going to happen if banks won't lend as much? Liquidity dries up!

Today's WSJ article describes how this business model may not work in today's banking environment (page C1, "CIT Scrambles for Cash"). So what about the other smaller asset based lenders? They too should start having difficulties raising money. This could pose a problem if your bank asks you to move your loan and no one will take you!

Don't Let Your Business Lose Money for Too Long!

Over the holidays we were asked by an investor to examine a company and determine if it could survive. We reviewed the financial records and met with management. At the end of our review both we and management agreed that we were about a year too late in saving the company! What difference does a year make?

What was different one year ago? The company had a profitable business surrounded by money losing products and high overhead. Action could have been taken to shed the unprofitable business, reduce expenses and grow the profitable sales. Unfortunately, time had run out!

One year ago the company had positive working capital and a good relationship with their vendors. Over the past year they consumed their cash and disappointed their vendors to the point that no one was willing to work with them. The best analogy would be to imagine you are flying an airplane and the engine stops. As the plane plummets toward the earth you don't wait until 1000 feet over the ground to bring it out of a dive! Same thing with a company!

If you find your company in a dive and losing money you should remember two rules:

Rule #1: Don't Lose Money!
Rule #2: See Rule #1!

It is imperative to take corrective action early in the crisis. Most entrepreneurs do not want to take one step backward. Unfortunately, it is sometimes necessary in order to survive a recession.

Defend the Bottom Line!

During a downturn in the economy the overriding goal of the Chief Financial Officer and management team is to defend the bottom line or profitability of the company. At a minimum you should achieve break even. The economy ebbs and flows like the tide. During the good times a company should generate profits and pay down debt. During a slow economy they should do everything they can not to give up the profits they have earned.

So once you find yourself in an economic downturn what should you do? You should first recognize that you can't save your way to profitability. Cutting costs though a useful tool will not get you to your goal.

The first step you should take is to get a good handle on cash and cash flow. You should prepare a daily cash report and a twelve month cash flow projection. You cannot run out of cash! Most managers fail to shift their focus to cash management until they have run out of it. By then it may be too late.

The next step may seem counter intuitive but is key to prospering in a downturn. You should increase your marketing expenditures and efforts. Most companies do the opposite! They slash advertising expenses and lay off salesmen to cut costs. If anything you should be doubling up on your sales effort! In a downturn there are still sales transactions taking place. There are just fewer of them. To maintain your revenue stream you need to get a larger percentage of the market. That takes more effort, not less!

Finally, to survive a downturn remember rule number one: Don't lose money! So restructure your costs to achieve break even with the revenue stream you are generating. The goal is to survive to fight another day!