Deep cuts

We were announcing a round of 10% cuts.

Never easy, but not unusual.

This round was different, though. It was only 6 months after the last 15% cut.

We'd left the door open after the first round, so it wouldn't be totally out of the blue.

But nonetheless, this was an L for the C-Suite. Specifically, an L for the CFO… me.

We hadn't gone deep enough the first time.

During the first round, I was 30% sure we'd need to do a second round. With hindsight that was enough certainty to cut deeper the first time. I should have pushed harder.

One round of cuts is just that. One round. A reset.

Two rounds of cuts are multiple rounds. And multiple rounds could mean 2, 3, or 7, as far as the workforce is concerned.

Those that survived the round would be looking over their shoulders.

I'd learned in that moment, that phases of a turnaround were important. It was important to get all of the pain delivered in one go. One comprehensive piece of surgery.

Like a controlled crop fire preparing for new plantings.

We'd failed to do that properly on this occasion, under my leadership. And the consequence was a widening of the 'bad news window.'

We were at risk of losing the locker room.

Turnarounds are tough, and you need clear messages at each stage to keep the business engaged through difficult times.

Following this moment, the CEO and I designed a communication mechanism for explaining progress on the turnaround.

We broke it down into 3 phases, across 7 different dimensions: the 7Cs.

Today I'll share how they work.

This is part 3 of a 3-part series on turnaround. Remember, even if you have no appetite to be a ‘Turnaround CFO’, you never know when you’ll need the skills. Many CFOs in venture-backed businesses have found exactly this over the last 18 months.

The 7 Cs of a Turnaround

We’ll get into the 7Cs of a turnaround. But first, the 3 phases.

Turnarounds go through 3 phases:

1. CPR

2. Intensive Care

3. Rehab

You don't give CPR to a patient with a sprained ankle.

And you don't give physical therapy to someone in cardiac arrest.

You need to administer the right treatment for the diagnosis at each stage of recovery.

Let's take each stage in turn:

1. CPR

The heart has stopped. The vital lifeblood (cash) isn't flowing. Until you solve that problem, nothing else matters.

Unless you can get cash flowing around the business properly, it's dead. There could be longer-term damage, or maybe not. But you don’t have time to think about that right now.

At this stage, survival is the name of the game. One wrong move of the scalpel and it's game over.

Priorities here:

• Jump start cashflow

• Restructure debts

• Buy time with trade creditors

• Remove obstacles (resistors and cultural terrorists)

• Dismantle loss-making businesses and projects

2. Intensive Care

The interventions of the first phase have worked. The patient is now critical but stable. They aren't fixed, but we have expanded the time horizon beyond hours and days.

The business has the cash it needs to execute its recovery plan. But it doesn't have room to fail.

We are only one or two steps away from falling back into CPR (as happened in the opening anecdote).

And with every trip back to the emergency room, the mortality risk increases.

The intensive care stage is about consistent, measured steps in the right direction. With flawless execution.

Priorities here:

• Cull projects and narrow focus to core

• Stabilize top line

• Secure team members

• Reassure customers and staff

• Strip all fat from the cost base

3. Rehab

The business is back on its feet, but not yet firing on all cylinders. Momentum is in the right direction, but we need to make sure old habits don't kick in.

There is some lasting damage from the original sickness. And the business is still feeling the impact of the interventions taken in stages 1 & 2.

While there is more leeway for wobbles than you had in the first two stages, you cannot rush it. It will need time, discipline, and consistency to avoid a return to old expensive habits.

Applied consistently enough, a healthy business will emerge.

Priorities here:

• Return to growth

• Maintain a sustainable economic model

• Reset strategy and identify sustainable ways to grow

• Re-engage the workforce for growth

• Address cultural and process failings.

If you've been following along, you would’ve seen Elon Musk moving through these stages at Twitter.

Those are the three stages of a turnaround.

But even then, each stage is complex and multidimensional. How do you break down the actions?

You use the 7Cs

1. Cash(flow)

2. Creditors

3. Costs

4. Core

5. Customer

6. Culture

7. Communication

The 7 Cs are in no specific order, but the first should not surprise you:

1. Cash(flow)

Your long-term objective is to maximize cashflow. That’s ultimately how you grow equity value.

But in turnaround, you should assume you are inheriting a business with negative cashflow.

That means you have two jobs:

1. Arrest the cash outflow ASAP, and force the business to become cashflow positive.

2. Ensure there is enough cash on hand to fund the cash losses until 1 has happened.

You need to make sure you start with enough cash to fund the upcoming cash burn (but not too much). All while addressing the cash burn itself.

It's a balancing act.

You should be pulling all working capital levers:

• Inventory sell downs

• Incentives to reduce customer payment terms

• Push supplier terms where you can

• Sell down assets, redundant equipment, etc. 

Use all the tools I shared through the cashflow series, but on Adderall (not literally).

You need to freeze capex too. No point investing in assets with a 10-year life, if your business life expectancy is 10 weeks.

2. Creditors

If you are in turnaround, often it's because there's an assumption that you will default on your debts. If you haven't already.

Creditors will be nervous. Rightly so. And those nerves will be contagious.

Here are some things you may face:

• Breached banking covenants

• Defaulted debt payments

• Trade credit insurance pulled

• Accounts payable overdue

• Suppliers stopping deliveries/services

• Wages unpaid

• Rent backlogs

Even if those things haven't happened stakeholders will believe they could happen. And respond accordingly.

Sentiment management is everything here.

The future of your business could be in the hands of a small number of creditors. And whether they believe in your payment proposal or not.

It's a very fine line.

There is a question of leverage here too. Most lenders don't like calling in loans, so you have an opportunity to negotiate. This is a great time to get a 30 cents-on-the-dollar haircut on your debts if you can.

Creditor negotiation is a whole topic in its own right. Probably not a series, but a special edition sometime.

3. Cost

Today's cost is tomorrow's cash burn. All of your cashflow and creditor manipulation will give you some relief today. But it won't last if you are burning.

As we said last week, you cannot control what you sell, but you can control what you spend.

You must slash every penny of discretionary spending. You can add it back in later if needed. Cut now and ask questions later.

Remember, you have to slow and eventually stop the blood loss. Cost reduction is your most credible, sustainable tool for doing so.

4. Core

In any business worth saving, there will be a profitable core.

It might be a big part of the business. That's good news, the turnaround phase will be quicker.

In others, the profitable core could be just one product category amongst 4 or 5. Then you are in for the long haul.

And it may not be a particular product, it might be a customer or group of customers. A channel. One factory. Or one region of profitable retail stores.

Finance plays a critical role in this. You must find the right analysis and dimensions to expose that profitable core.

Then you need to put every part of the business into one of three buckets:

1. Profitable core

2. Not profitable today, but can be with price increases or cost cuts

3. Not profitable nor capable of profit in the short term

You should focus your efforts (in the early stages) on 'fixing' those things in bucket 2. And closing/killing those things in bucket 3.

It's back to the subtraction principle from last week. Understand the net negative influences on the P&L, and fix or remove them.

Now is not the time for grand strategic thinking. Identify 'the core' and then get the business back to that core. This is how you will earn the right to have a strategy.

This work needs a great understanding of unit economics, so finance has a big role. We’ll cover unit economics in a future series.

5. Culture

Culture is the things the business does when it’s on autopilot. In a business requiring turnaround, you can bet those things are not healthy.

But building a great organizational culture takes time. Years. You cannot build it in a turnaround timeframe.

But you can:

• Reset the culture

• Sew the seeds for a better culture

True culture change is not something for the turnaround phase. You haven’t got time for it. But you cannot let the stains of the old culture get in the way of the turnaround.

You must undo some of the old culture. The parts that will get in the way of the progress that you need to make. This often means removing 'internal terrorists' and making some symbolic changes.

There is often a 'loser' culture in failing businesses, too. Sometimes it even becomes a joke or a badge of honor. Employees start to feel sorry for themselves.

That sh*t has to go. FAST.

You need to find ways to show this is a group that can win, or change the group until it is a group that can win. And want to give it their all.

6. Customer

It's easy to take your eye off the ball with the customer in the early days of a turnaround. But no customer, no business.

They may have even been let down by poor product or service. Or maybe they haven't, ut they have heard rumors of your demise and are 'contingency planning.'

You need to talk to them. They need to know what you are going through, without spooking them. Your personal credibility as a management team will be critical here.

Explain to them how you are going to deliver 'business as usual' through this change. And importantly, show them how the turnaround is going to be good for them.

Will it make you cheaper eventually? If so, how do they benefit? Will it make you more responsive? Improve levels of service?

Or maybe you are breaking bad news. If prices are going up or you are discontinuing certain products. You must focus on protecting your key customer relationships.

7. Communication

People will want to know what is going on. Employees, customers, suppliers, lenders, shareholders, etc.

Design a communication rhythm that works for each stakeholder. Be as open as you can be, but also be mindful of being too transparent. One person's good news will be another person's bad news. If you are closing a loss-making factory, shareholders and lenders will be over the moon. Customers and employees of that factory, not so much.

Regular town halls with employees to show you are listening are invaluable. But only once you clean out those who don't want to listen. And written updates for shareholders and lenders. Even customers and suppliers if necessary (albeit the content will be different).

Commit to an update rhythm. Probably weekly or even twice-weekly with employees to start. Monthly updates for customers, investors, etc.

General management theory says there is no such thing as ‘too much communication’. That's generally true, but also be mindful of when it's helpful to have tactical moments of silence. If you are negotiating with lenders, for example, it might be better to keep your cards close to your chest.

The key thing is to have a clear, well-controlled comms plan.

Bringing it all Together

You will spend a different amount of time in each ‘C’ at each stage.

It might look a bit like this:

You will need to over-index on cash, creditors and cost to start with. But as things evolve you should be able to have a more balanced focus, and address root cause issues (often found deep in culture and process).

I am working on a checklist of the most important things to do under each ‘C’ for each phase of a turnaround. For my own use. I plan to use it to keep me on the right path. And remind me of the priorities, when in the heat of a turnaround battle.

If you would like to see it, please reply to this email to let me know. If there is enough demand, I’ll share it.

And that’s turnarounds. I love this topic!

Haunter from Colorado, USA asked:

I spent six months at PwC in their audit practice before realizing it was horribly boring... so I quit and went back to the small company (mid to high seven figures in sales) I was previously at where I did FP&A/accounting/strategy, and now I'm doing my old role + marketing + serving as chief of staff (it's a lot, I know; I'm staying quite busy). I enjoyed it before and enjoy it right now, but I have a gut feeling in a year or two, the learning opportunities will plateau.

I like being in a generalist role, but being back in this role has shown me I want my next role to be at a much larger (publicly traded? PE-backed?) company in a pure FP&A role. I know the more typical route is to start at big companies and THEN go downstream to "smaller" (whatever this means) companies after learning best practices. So I'm a bit concerned about what this attempt to swim upstream will look like...

Any tips on this?

Not necessarily worried about how I will perform in interviews once I have my foot in the door, more so worried about being able to get my foot in the door in the first place considering I'll be coming from a company people haven't heard of. I guess having PwC + my school's name (T10 school) on the resume will help, but would love CFO Secret's take on this. TIA!

Haunter, it sounds like you’ve got some interesting experience as a generalist. But it also sounds like you’ve hopped around a bit. To climb the ladder you need to build some specialist skills, and that is hard if you spend too much time as a generalist.

If you want to be in a large company - then you need to get in that environment (and accept that you may have to take a step back to go forward). But be sure that’s what you want first.

My general advice for those early in their career is to just pick a path that you don’t hate but are good at. Then put 3-5 years of sweat into developing mastery of a specific skill set. Then you can use that skill set, experience, and reputation to leverage it into where you want to be.

Only you can answer what and where that is, but I hope that helps you and wish you the best of luck.

If you would like to submit a question, please fill out this form.

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And Finally

In case you missed it; I was interviewed by The CFO magazine. We talked about the CFO role, working with CEOs, and how I manage the finance function. Check it out.

Next week is the one you’ve all been asking for! We will revisit my small business purchase one year on.

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Stay crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director, or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need.