Turnaround & Restructuring

Top 10 Tips for Troubled Companies and Financial Insolvency

Even well-run companies can hit rough patches and find themselves in states of financial insolvency. Internally, management changes, unscalable systems or a lack of human capital may lead an enterprise into distress. Externally, changes in the economy, social environment, technology, competition and political landscape can all significantly influence the financial conditions of companies.

Even in the most dire scenarios, however, there is almost always a way to mitigate the damage and dig yourself out of a hole. Following are my top 10 tips, best practices for troubled companies I’ve learned from nearly a decade as a consultant in turnaround and restructuring services. 

1. Evaluate your current financial position.

Oftentimes, executives simply don’t know where their companies stand. No matter the reason you wound up in distress, you first need to take a comprehensive overview of your financial statements. Review your balance sheet to understand your assets and liabilities, the most important of which is your working capital. Also, make sure you understand the ins and outs of your income statement. You need to know not only how much cash you’re spending on your most important items; you need to understand the timing of those payments. Overall, getting these ducks in a row will show you whether or not you’re solvent – and how your solvency will change in the near future.

2. Prepare short-term cash projections.

Most companies at risk for financial insolvency simply haven’t built processes around daily and weekly cash flow forecasting. This is a major mistake, as short-term cash projections allow you to understand exactly when you’re likely to face shortages, and whether or not you will default on your debts. If you’re in this situation, your financial analysts need to compile short-term cash projections and implement consistent tracking procedures. Weekly and even daily meetings with your management teams are also imperative for adjusting payment policies and staying solvent.

3. Manage your short-term cash needs.

Based on those short-term projections, you’ll need to work on optimizing cash flow. There are three main ways to improve your cash flow: speeding up accounts receivable, slowing down accounts payable and selling nonessential assets. Managing receivables is mainly a matter of encouraging customers to pay on time or ahead of time, typically by offering discounts to early payers. In contrast, you can extend payables by taking as long as possible to pay your own debts. Asset sales are far less feasible for most companies, but a combination of two or three of these methods is critical to improving your short-term cash flow.

4. Know the consequences of a default or breach of contracts.

Most debt agreements require you to maintain certain amounts of cash, accounts receivable and inventory or some combination thereof. Do you know the consequences of breaking them? Many agreements allow lenders to freeze a company’s bank accounts and/or inventory in the event of a breach, and during a financial turnaround, any disruption to the ordinary flow of business can be devastating. Before you break any contract, consider the ramifications, and explore other options that will allow you to remain in your creditors’ good favor.

5. Communicate with senior management.

If you’re the CFO, CEO or another senior management member leading your turnaround, you need to bring all of your key executives together to develop your game plan. From Operations to IT to HR, every department will have something to contribute, and there’s no sense in implementing individual strategies without an overarching plan. High-level communication is particularly important for firms with disparate locations. Different offices may have different levels of knowledge and buy-in, but they all share the same bottom line.

6. Explore out-of-court restructuring.

Pursuing receivables and stretching out payables can only take you so far. Fortunately, as an owner or chief officer, you can explore several out-of-court options before you consider bankruptcy. Negotiating with creditors may lead to default forgiveness or alternative payment arrangements. Short-term financing can carry you to the end of slump. And, in cases where your business simply can’t sustain itself with its own capital, a full or partial sale may be the best solution to ensure long-term sustainability.

7. Don’t rule out bankruptcy.

Bankruptcy doesn’t have to be as scary as the many headlines make it out to be. Under Chapter 11 of the bankruptcy code, all of a company’s debts can be frozen as it reorganizes and develops a plan to satisfy them over the long term. The court can also ensure fair dealings between you and your creditors and prevent fines and lawsuits as you’re rebuilding your business. You will be subject to scrutiny as you restructure, but for many troubled companies, that’s a far better option than the liabilities that come with out-of-court settlements.

8. Act sooner than later.

Planning ahead is paramount to a successful turnaround. Executives often wait far too long to implement new strategies, and they run out of cash before they can create any significant change. If you know your business inside and out, and if you’re projecting your cash flow on a daily, weekly, monthly and yearly basis, you’ll know two to three months ahead of time when you’re about to encounter a rough patch. If you wait until the last minute to address cash flow concerns, it’s very unlikely that your creditors will give you favorable deals. 

9. Seek third-party help.

Staying on top of your cash flow is often easier said than done, especially when you’re in a growth phase and servicing multiple new clients. Fortunately, a qualified financial consultant can help you in all areas of finance and accounting. In situations when restructuring is necessary, turnaround consultants can provide a very specialized set of skills. They can assist in creditor negotiations, securing financing, legal and court compliance and selling off assets.  Just as important, you need a bankruptcy attorney who can work with you and your advisor throughout the turnaround process.

10. Tend to your core business.

Last but far from least, you need to continue to nurture and stabilize your business during the turnaround period. Restructuring requires significant time and energy, and executives often ignore operations to focus on short-term cash. This is the last thing you want to do when you’re in a downturn, as failing to meet clients’ needs will only make it harder to generate more cash in the future. Ultimately, the best course of action is to engage outside help, trust their processes and focus on your primary duties.

If you’re facing a downturn or encountering cash flow problems, please contact us to learn how our Consultants can help you turn your business around. You can also download our information sheet to learn more about how 8020 Consulting works with clients in times of crisis:

business stabilization and contingency planning

About the Author

Travis has over ten years of experience in corporate finance and strategy consulting, helping clients navigate complex financial issues and transactions. Prior to joining 8020 Consulting, he served as the Director of Finance at FTI Consulting, where he specialized in providing financial turnaround, restructuring and transaction-related services. His diverse industry experience includes entertainment, automotive, real estate, healthcare, gaming, food and beverage, financial services and technology. His core competencies include strategic planning, financial modeling, forecasting and budgeting, corporate restructuring, due diligence, post-merger integration, valuation, financial statement preparation and operation planning. Travis holds an M.S. in Finance and Accounting from the University of San Diego and a B.S. in Accounting from the W.P. Carey School of Business at Arizona State. He is also an active CPA in California and a Certified Insolvency and Restructuring Advisor.

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