Beyond Repair

I remembered the words of a mentor I’d spoken to shortly before taking this turnaround role on.

He said “when businesses are broken, even the most fundamental things stop working. You will sit in your office, pull a lever, and instead of that lever doing what you think it will, it just comes off in your hand. You have to know how to reconnect those levers to the business. Oftentimes that means something unconventional.”

Now I knew what he meant.

This business had lost control of how it was spending money. It was institutionally lazy. Or ignorant. It didn’t matter which. The result was the same.

Raising purchase orders long after services were delivered. Often even after the invoice had arrived. By that time we had no choice other than to pay the invoice.

For a large complex business, this was chaos.

The business was committing to unnecessary costs on autopilot. Spending its way to bankruptcy. And fast.

We were 3 months or so into the turnaround, and I’d exhausted the conventional approaches to shutting down discretionary spending:

• Elevating sign-off limits

• Mandating finance pre-authorization on all costs

• New headcount controls

• Expanding the remit of corporate procurement

• Communicating new processes to all employees and suppliers

We’d even fired some people for not following the new policies. We figured that would get the message across.

So, I was shocked to see there were still over $10m worth of costs committed without proper approval. In just one month!

Even more shocking was those costs had been committed by 87 different people. From nearly all parts of the business. Some even in my own team.

This was a much bigger cultural problem.

I’d pulled the ‘stop spending stupid money’ lever, and it had broken off right in my hand.

The situation needed more radical intervention. Something unconventional. A circuit breaker.

I asked the CIO to move purchase order approval limits to $1 for many parts of the business. Effectively removing the ability to get invoices processed and paid, grinding their functions to a halt.

The business processed thousands of invoices a day. So this wouldn’t be sustainable for long, but I only needed a few days to make my point.

It was a drastic measure and caused even more problems in the short term. But it did get attention. It took cost control from way off the radar to the number 1 topic across the business overnight. Where it belonged (at that moment at least).

It took a month or so to catch up on the admin mess that came as a result. But it did work.

People started to take cost control seriously again.

Note: this is not a course of action I would recommend. It was an extreme measure for an extreme situation! I share it because it illustrates a point about how controls you assume are working often do not in turnarounds. That’s why they end up in turnaround!

This is part 2 of a 3-part series on turnarounds. 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.

Turnaround Principles They Don’t Teach in B-School

A lot of conventional management theory fails to survive a real-life sh*tshow.

The skills you learned in business school won’t work the same way in the real world.

Turnarounds are turnarounds for a reason. There is dysfunction in the business.

You don’t have time to fix the dysfunction. The business will run out of cash before you’ve finished.

You have to deliver despite the dysfunction. And eliminate it all at the same time.

All while giving the cash flow an urgent adrenaline shot.

Here are the 5 principles you need for day 1 of a turnaround that you won’t learn in business school:

1) Be an autocrat

Most modern theory on management encourages some level of democracy inside a business. Employees should challenge their boss. Constructive dissent. Invest time in hearing objections. Organization-wide buy-in.

But in a business facing imminent failure, there is no time for debate. Doing nothing is death. You must get urgent momentum in the direction of cash generation. And must do so with surgical precision.

This is not the time for meaningless pontificating:

• “If only we could get sales and operations working better together.”

• “We just need to win this one big project.”

• “We just need a bit more time to get this new product finished.”

A CEO/CFO/CRO in a turnaround needs to think like a doctor in an ER.

You are there for the patient (i.e. the business)

This focuses your actions …

Let’s imagine you have a patient in front of you with bullet holes and arteries losing blood. This is not the time for a visit from a dental hygienist.

All that matters is fixing the cause and consequence of the blood loss as quickly as possible.

You need people around you to execute precisely. If they don’t… they can’t be in the room.

Same in a business turnaround. You have to be clear about what needs to be done.

And you need people around you who will put their egos aside and execute.

What happens to anyone who resists? They have to go. TODAY.

Even if they are ‘important for the future of the business’. Right now, there is no future.

In a failing business, you need to earn a future.

In a failing business, the existing management system has failed.

People are looking for leadership, and you need to provide it.  That means acting swiftly on anyone who doesn’t see things the same way. It might sound harsh. But that person is putting the whole organization (including everybody's job) at risk.

Once you’ve got the patient out of the ER and in more stable condition, you can take a different, less short term, view. And focus on repairing the wounds from the surgery.

But until then, you need to be an autocrat.

2) Assume nothing works

One common feature in every turnaround I’ve ever seen: basic processes have fallen apart.

There are important things that management assumed were working in the business. In reality, they weren’t working.  In fact, they were a dumpster fire.

Things I’ve heard management say in failing businesses:

• “I just assumed our credit control team was collecting cash on time.”

• “I didn’t realize our ops team was creating that much waste. I thought someone was looking at it.”

• “I assumed our property guy checked the rent escalator clause in the lease.”

• “We had a process for rotating old inventory, I don’t know why they weren’t following it.”

In a failing business, something has gotten f*cked up. So you CANNOT assume that when you decide/instruct to change something, that it will happen or work. Just as we saw in the opening anecdote.

The reporting is probably compromised too…

Wrong data sources, double counting, bad KPIs…

Your default mindset needs to be one of skepticism. 

• Is this reporting I’m looking at correct?

• Am I hearing the truth? 

You need to be constantly looking for holes and errors. Because you will find them everywhere in a turnaround.

Many people don’t have that mindset. Their default position is to believe what's in front of them. That is a recipe for disaster in turnaround.

3) Subtraction first

Oftentimes, the default discussion in most businesses is about addition...

• More sales

• More customers

• More products

• More people

• More growth projects

If you add enough stuff, the compounding flywheel starts. And compounding is the key to everything… right? RIGHT?

Not in a turnaround.

When fixing a business, you need to think about subtraction.

If you are running out of cash, then all eyes need to be on cash flow.  Short term cashflow. Adding sales often doesn’t help that.

Sales growth should be cashflow positive in the long run. In the short term, often it isn't. It requires additional investment in receivables. And inventory to fund the higher levels of activity in the business. Right now, you can't afford to grow sales.

The good news is that the converse is also true. Revenues decline often release cashflow in the short term. You'll usually find this trapped in inventory and receivables.

"So are you saying, I should shrink my way to glory!?"

No, that would be like the band playing on the Titanic (Idiots... I don't care how much I love my violin... I'm getting on that lifeboat).

My point is that this is a great time for a ruthless rationalization of customers & products.

Think about your revenue set out in a grid: customers on one axis and product categories on the other. For each row and column, understand:

• Your net contribution

• Estimated cash conversion cycle. I like % of revenue, but most use days.

It should be clear which products & customers are not contributing marginal $ to your cashflow. Or cost too much working capital to service.

Now get ruthless, and start cutting. This is survival you are fighting for.

This works equally well with multi-location businesses. You will have locations that are negative contributors on the net whole.

Identify them. And be cutthroat.

Same with projects. CEO has a pet project cost center developing the next big thing? Sorry boss... it's on the bonfire.

Once you have your list, go execute.

That means physical removal. You can't assume people will just stop doing things. You've got to stop it.

That means:

• Blocking the offending customers and products in the ERP system

• Selling the inventory (in bulk) that isn't needed

• Removing the warehouse/desk space, etc etc

If this sounds like a blunt instrument, it’s because it is. But we are talking about situations where 'do nothing' means 'die'. And that will cost everyone their job.

By doing it in one short, sharp hit, the organization doesn't have to endure death by 1,000 cuts.

Then quickly something amazing will happen:

• Your cashflow will improve (by definition, you have subtracted a negative number, leaving a positive impact)

• Your business will radically simplify

• Excess overhead will expose itself allowing easier removal of fixed expenses.

But most importantly, you have created the fertile ground for a business that can prosper.

NOW you can start growing.

And with a lean, fit, cash-positive organization, you will smash it.

But start with subtraction. You are in control of removing things that exist. You are not in control of adding things that do not yet exist.

You cannot afford to gamble on things you do not control.

4) Get hands-on

Great management is all about delegation and giving people space to grow, isn’t it? 

Generally yes, but that doesn’t work in a turnaround.

In the early days of a turnaround, you need surgical precision and lightning speed. There isn’t time for deliberation, or learning on the job.

You need power concentrated in a small number of people.

What is the best way to achieve this? Everyone needs to get hands-on. Drop down a level, or two. Everyone should be executing well inside their circle of competence.

That way you can leverage experience to make decisions close to issues. You will see underlying problems firsthand.

The wiring down inside the business needs fixing. And that needs a combination of experience and urgency.

That is best achieved with everyone dropping down a level.

5) Kill the stories

Another feature of broken businesses is they tend to lack fact-based conversations.

Organizations make decisions using gut feelings rather than data. Longstanding ‘rules of thumb’ rule the day.

The business will be full of anecdotes and stories that put guardrails on thinking and action.

Examples:

• “That supplier would never deal with us on 90-day payment terms.”

• “As long as our sales are growing by at least 5%, cash takes care of itself.”

• “EBITDA is close enough to cash flow, so we just measure EBITDA.”

• “In-house logistics is always cheaper than 3rd party.”

These are all real things I’ve heard in turnaround situations, without ever seeing any facts to support these claims.

You have to tear these down.

In a turnaround, everyone needs a paradigm shift.

The long-held beliefs need adjusting.

You need to replace conjecture with clear simple feedback loops based on facts.

But to start you have to ‘kill the stories’

How do you do that? A ritual sacrifice…

Take the most damaging and commonly used piece of fiction in the business. It won’t take long to find it. Then disprove it. Conclusively.

Do so with the largest audience possible. And with a bit of theatrics. Chop its head off in the town square.

Then give the business a new story: the old story was sh*t.

And that maybe some of the other stories are sh*t too.

So let’s get back to first principles and fix this thing.

It works.

Some of these five approaches probably sound a bit primitive or old skool.

Maybe so. But we are talking about the first steps to fixing businesses in the most extreme throes of failure.

And you needn’t be in this mode for long. You don’t want the patient on the operating table for any longer than necessary. Only as long as it takes to get cashflow moving in the right direction. And to reset the base way of thinking in the business.

Once you have the right base, you have the fertile ground to rebuild and move through the phases of a turnaround.

Next week, we will round off the series by stepping through the 3 phases of a turnaround and the 7 ‘Cs’ of turnaround success.

Check it out…

I had the chance to sit down with The CFO magazine for my first ever interview. Check it out.

Max O. from Switzerland asked:

How do you use Variance Analysis in your daily work? How do you define them and how important are they in general?

Variance analysis is huge. It’s at the heart of all meaningful finance reporting.

If you say ‘we beat our gross margin target by 100 basis points’, you will be asked ‘why?’ before you have even finished your sentence.

And as the CFO you will be expected to know the answer or find it quickly.

That is where variance analysis comes in. It’s a broad topic, but it generally refers to comparing a period of actual performance to a base and then explaining that movement, clearly and correctly.

For example:

• A board report explaining the year-on-year operating profit margin movement from one year to the next

• Digging into why 100 more man-hours were spent on a production line yesterday vs. the standard cost

• And everything in between…

Without precision here, the story the business will default to is that:

• adverse variances are driven by misfortune and impossible acts of god, and

• favorable variances are driven by mercurial management brilliance.

You need to use variance analysis to expose the truth.

A good FP&A team will be clear on what variances are the most important to understand. And then will have processes in place to capture thosee variances, analyze them, and explain them to stakeholders. But I often find finance teams falling short here.

A good starting point is a price, volume, and mix analysis. Being able to properly isolate the different impacts from one another is important. And can get quite complicated. Isolating price impacts has become particularly important over the last couple of years as we all relearned how to measure the impact of inflation on the P&L.

This is a huge topic I look forward to covering more in a future series.

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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.