Whether a distressed company is going through a turnaround or a restructuring, it can benefit from having an interim CFO at the helm.
Whether a distressed company is going through a turnaround or a restructuring, it can benefit from having an interim CFO at the helm.
According to a report by IMD, 2022 saw several companies go into distress:
Now, distressed companies usually decide to perform a turnaround, and, in extreme cases, they can go for a company restructuring. In either scenario, they need to have a CFO helping lead the righting of the ship, and if the company in question doesn’t have a financial leader, then it should consider bringing in an interim CFO.
But before we see how an interim CFO can help with a turnaround process, let’s be clear about what such an exercise entails in the first place.
When asked, Roger Morrison, a seasoned CFO with more than 4 decades of experience, defined a turnaround as follows:
“Companies start throwing around the term turnaround when they aren’t making the money they think they should be making.
So, the company is either failing to meet its revenue goals or is hemorrhaging cash.
In either case, the company needs to assess the situation and turn things around, hence the term turnaround. For instance, it might find that it needs to cut costs or to raise its prices, depending on where the problem is coming from.
In extreme cases, the company might have to cut headcount or even shut down entire departments.”
While defining a turnaround can be simple, the difficulty is deciding when one is needed. After all, having a bad month where your business fails to hit its targets is not the same as suffering from an endemic problem that could be crippling you.
To that end, the first thing you want to do is to look at your cash and covenants.
If you are having cash issues, i.e. a working capital problem, you need to solve that problem before anything else. For instance, you might be exceeding your revenue goals according to your income statement, but you collect on your accounts receivable in 60 days on average, while your suppliers collect on your accounts payable within 30 days.
This difference between the accounts payable and accounts receivable could create a cash flow crunch, and you need to address it before it affects other parts of your business, such as payroll.
Another issue could be low profitability. For example, if your company has low gross margins, you need to investigate why. You might be undercharging your clients, or there might be some other problem you need to work on.
A case in point can be seen when Roger Morrison, our CFO from earlier, had an interim assignment in North Carolina. When he looked into their gross margin problems, he realized that one of the main issues was that the company was generating around 70% of its revenue from one customer, who was underpaying. Accordingly, the easiest fix was renegotiating with said customer, giving them the full picture, and increasing the prices accordingly.
Another thing you need to look at is your covenants. You don’t want to find yourself in a situation where you are close to breaking your covenants, putting you in hot water with your lenders. Instead, you need to monitor matters diligently and look for any red flags that might warn you that you are getting close to breaching those covenants.
And should those red flags start waving high, it might be time for you and your company to consider a turnaround.
Part of what makes a company turnaround difficult is the need to dig into the financials and weed out the problem. It takes a level of expertise that comes from years of experience.
And this is what an interim CFO can bring to the table. Having engaged with numerous companies going through different types of transitions, they have usually seen every type of problem your company could go through ten times over.
To that end, let’s go over the steps an interim CFO would take to solve your company’s issue and facilitate a turnaround.
As mentioned above, the first task is to identify the core problems. Remember, your company might not be hitting its revenue goals, but that is only a symptom. An interim CFO will first figure out the underlying reasons for missing those revenue goals.
To identify the core problem, the interim CFO will start by talking to your management team and anyone remotely related to the problem, which could include the company’s board or the private equity firm invested in the company. They will have these conversations before even starting their engagement, during the interview stage, giving them a better perspective of the problem and its possible underlying causes.
Once they start their engagement, they begin drilling deeper into the problem. For instance, if your company has a working capital problem, then the interim CFO will analyze the different components that could be leading to the problem: They will look at your cash receipts, your inventory, your accounts receivable, your accounts payable, and anything else your company might have that could impact your cash flow.
In their pursuit to figure out the core issues behind your problem, the interim CFO will use different benchmarks and KPIs to see where your company stands relative to the benchmarks within your industry. For instance, if your day sales outstanding, which looks at how long it takes you to collect on your accounts receivable, is around 80 days, whereas the average for your industry is 40 to 50 days, then this starts cluing them into why your working capital might be suffering.
Another issue contributing to your working capital woes might be an overinvestment in inventory. In this case, you might have exorbitant inventory, seeing a very low turnover ratio. So, a lot of your company’s cash is tied up rather than providing your company with liquidity.
Having spotted the different issues contributing to your problem, the interim CFO will start prioritizing them.
To expedite solving your problems, the interim CFO will prioritize the core issues that they have found.
To that end, they will segment both your products and your customers. The idea is that they need to get an idea of the scope of each issue and the level of its impact.
Going back to our example from earlier, assuming your company has a working capital problem due to unusually long day sales outstanding, shortened as DSO, and overinvestment in inventory, the interim CFO will ask two following questions:
Also, speaking of customer segmentation, your interim CFO will look at the following elements:
This exercise gives your interim CFO a better idea of how your business operates and helps them address some critical assumptions regarding your company’s profitability and growth.
Having identified the different problems and prioritized them, the interim CFO will start looking at the tools at their disposal to solve the problem.
So, if they realize that your company is losing money and want to staunch the outflow of cash, the interim CFO will go over your profit and loss statement line by line. They will look at your salaries, benefits, travel budgets, entertainment budgets, supplies, rent, and anything that is costing you money. And as they go over each line, they will ask two questions:
So, for instance, if your company has exorbitant travel costs, your CFO will explore different solutions from installing a clear travel policy to limit spending all the way to restricting or canceling travel for most employees.
The solution your interim CFO will recommend will depend on a few factors:
So, if your company can save $250,000 by implementing a travel policy, but canceling travel altogether would only save you $350,000, then the option of all-out cancelation might be too severe, and the policy is preferable.
However, in some cases, the interim CFO might suggest layoffs as a cost-cutting methodology. That said, if layoffs are necessary, then they need to be managed with precision to maintain employee morale.
For starters, if you are going to rip the bandaid, Roger Morrison suggests ripping it off all at once. Accordingly, it might be best to do the necessary layoffs in one fell swoop rather than in stages.
The reason is that if you do the layoffs in stages, your employees will always be holding their breath, waiting for the shoe drop and to hear their name being called out during the next wave of layoffs. This can create a very stressful environment for people at the company.
Instead, if you will lay people off, lay off more than the bare minimum. Rather than minimizing the number of let-go employees and doing it in stages, work hard to cut your costs once and then give people some sense of psychological safety, at least for the short-term future.
If the company isn’t achieving its revenue goals, your interim CFO will help you revise your pricing strategy.
However, aside from that, there aren’t many tools for your interim CFO to leverage. At the end of the day, identifying new leads and getting in more clients falls on your sales and marketing teams.
Instead, it is your CFO’s responsibility to make sure that once that revenue comes through the door, it is profitable revenue.
In very extreme cases, the only solution might be restructuring your business. But before talking about when to go down that road, let’s explore what it entails in the first place.
Again, going back to Roger Morrison, he defines business restructuring as follows:
“A business restructuring is an all-encompassing thing. It is far more involved than a simple turnaround.
So, rather than focusing on the solutions to a few problems, you have to do a whole host of things to save the company. This could include anything from plant closures to installing travel policies to perhaps even cutting out the coffee service in the break room.
The idea is that a business restructuring is a drastic effort, and it might even occasionally make sense to bring in a restructuring firm to help with the planning.
Moreover, once you have a restructuring plan, you need to take that to your lenders and explore whether they will forgive the company’s debt, inject more capital, or take any other action to help the company.
The reason your lenders factor heavily in your restructuring plans is that if your company has a huge debt load that is weighing it down, the company needs to lose some of that load somehow, be it through forgiveness or a reduction of rates. Otherwise, the company may never be able to bounce back.”
Given how drastic a business restructuring may be, companies shouldn’t engage in it without due thought. Instead, they should carefully consider the different options available.
For instance, if a few tweaks are enough to right the ship, then a restructuring exercise wouldn’t even come up in the conversation. Instead, an interim CFO will bring up the topic of restructuring if they feel that your company is in a dire condition and might be unable to pay back its debts.
So, where is that line in the sand where restructuring starts becoming a viable option?
Simply, if you do a cash forecast and realize that the company won’t have any available cash within the next six months, then restructuring the business becomes a real option. Moreover, restructuring makes all the more sense if, on the path to fixing the eventual cash shortage, your interim CFO has tried every possible cutback, yet the company seems still headed toward the edge of a cliff.
At the end of the day, it is a judgment call and a forecasting call, but restructuring is a last-ditch effort to save a company.
On average, a restructuring exercise will take somewhere between 3-6 months, and occasionally, it might take longer. That said, as you are going through the restructuring process, you will get a pretty good feel for where things are headed.
And there are times when things have to get worse before they can get better. For instance, the company may have to file for bankruptcy before it can get back on solid footing.
Throughout the restructuring process, your interim CFO will have a few key areas of involvement, and you can broaden or narrow the scope in the agreement.
For starteris their cash and profitability forecasat help give the go or no-go decision regarding the restructuring process. In other words, their work gives management more visibility into the company's potential future, making a drastic response such as business restructuring more palatable.
Following that, the interim CFO helps with laying the restructuring plan, and if your company brings in a restructuring firm, the CFO will be one of their main points of contact. Additionally, as the restructuring process is going on, the CFO will keep their eyes on the necessary KPIs to see what direction things are going and whether the restructuring is going according to plan.
Moreover, part of the restructuring effort includes the interim CFO putting together forecasts to show what the company’s future will look like after the entire exercise is done. Accordingly, these forecasts are then taken to the company’s bankers or lenders to convince them that the company is still viable and that the debt load needs to be reduced somehow.
Having seen how a turnaround or a restructuring plays out, it is worth going over the different elements that can play a huge role in either process.
Remember, company turnarounds and restructuring are all about trying to right the ship because the cash flow projections are saying that the company may not survive a year into the future.
As a result, you are in a race against time, and a sense of urgency and expediency are critical.
Moreover, when you consider a company’s existing debt load and how that factors into its problems, you realize that time is against you all the more.
Earlier, we saw that many decisions hinged on the interim CFO’s cash flow and profitability projections. Accordingly, the CFO’s responsible for communicating to the rest of the team the type of problem they are facing, the size of the problem, and the possible next steps to remediate the situation.
Moreover, companies need to communicate with their lenders, especially if their debt load is one of the factors dragging them down.
Moreover, the company in question might have to communicate with its suppliers, especially if its problems become public knowledge. For instance, if a supplier is offering your company a credit line, and they get wind that your company is in the middle of a restructuring exercise, they might get very nervous very quickly, wondering whether you will be able to pay back what is owed.
As a result, they might start taking some corrective actions to protect themselves. For example, they might try to close your lines of credit, demanding that you pay everything that is owed before conducting any more business with them. Alternatively, they might increase your interest rates to hedge against the increased risk they are taking.
Accordingly, you need to communicate with your suppliers, alleviate their concerns, and negotiate an outcome that is satisfactory to both parties.
Another group you need to communicate with is your employees. Throughout the turnaround or restructuring process, there will be plenty of confusion and even chaos. So, employees need to hear from you and be notified step-by-step of what is going on. For instance, if you have decided to change your travel and entertainment policies, they need to be the first to know about it. If you are shutting down a division or laying off a group of employees, this needs to be communicated clearly and delicately to them.
As we were exploring different ways to cut back costs, we saw that layoffs can be a dreaded but necessary tool. And although it can be efficient, the problem is that layoffs can be very demoralizing to the remaining team members.
And when your star employees feel that the company is taking a turn for the worse, their first instincts might be to jump ship and seek gainful employment elsewhere.
As a result, management, starting with your interim CFO, needs to find a way to retain these employees, which could include retention bonuses, for instance. Additionally, you need to convince said employees that the company has a path forward. That means showing them that the private equity firm invested in your company is fully behind this turnaround effort, or it could mean sharing that your lender has agreed to forgive a portion of your debt.
Whatever the case may be, managing morale and expectations is key.
No company wants to find itself undergoing a turnaround process, let alone a restructuring one. Nevertheless, if the business isn’t hitting its targets or is failing to see how it can repay its debts, then these exercises might be necessary.
To that end, having the right interim CFO to guide you through these processes can be extremely valuable. They can perform the cash flow and profitability projections that paint a picture of what the future looks like for your company, and they can also help you chart out a path to avoid said future. And as you are righting the ship, they will leverage the necessary KPIs to track your company’s progress and to show the world that things are taking a turn for the better.
That being said, if you feel that your company has been having some financial problems and might be ripe for a turnaround, then feel free to reach out for a free consultation. We would love to help you explore the best solution for your problem and assist you in any way we can.
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