A Troubled Company Often Exhibits Some Warning Signs
26 January 2010    Bob

Came across this article on the http://strategiccfo.com/ website and was reminded of warning signs from past clients. The article is a goodread, both for analyzing a client's current condition in a turnaround effort and for managing an ongoing concern where you want to stay ahead of any problems. Here are a few noteworthy items with my comments from their checklist of early warning signs:

• Cash shortfall:   This is an obvious warning sign. However many companies evolving out of a start up believe this to be status quo. They successfully conquered the cash problems while building their business, so they should be able to do it again. Analysis of comparable industries & sizes can help clarify this issue. Ibbotson to the rescue!


• Physical deterioration of equipment or facilities:   Maintenance of equipment is often ignored and goes unnoticed because it doesn't show up on the income statement until it is way too late. The simple fact is that a dollar invested in R&M pays back ten fold over the useful life of the equipment or facility. One of our clients instituted a very stringent maintenance program on his fleet of route vehicles that effectively extended the life of each $150K+ truck by several years. Conversely, managers who ignore this high yielding, albeit internal investment are usually making poor investment decisions in other areas of their business as well.


• Poor Accounting Systems:   The management adage of "you can manage only what you can measure" applies to operational metrics and accounting systems. We have helped many clients evolve their existing systems into productive management tools by restructuring their general ledger accounts and reporting processes.


• Poor external/internal communications:   A corporate climate where employees don't talk among themselves and their stakeholders (suppliers & customers) will negatively affect operational efficiency and the bottom line. Changing such an organizational mentality requires long term effort, and in all cases must start at the top.


• Critical information is ignored:   Sometimes this is due to inexperience of a manager, other times it is a sign that they are in denial. As business consultants, we sometimes have to bring out the bull horn to make sure that the managers take notice of what they earlier ignored.


• Defensive management team:   Managers are spending a majority of their time explaining, and in some cases rationalizing the reasons for their situation. Yes, it is still important to uncover the root causes of problem areas. However, effective managers and leaders need to move on and become proactive problem solvers. Sometimes, I wish that I had taken more psychology classes in college.


• Dishonest/Unethical business practices:   The human creature has evolved into a very adept creature at "situational awareness". Usually during the first few meetings with a client, one can pick up the subtle signs that things are not on the up and up. As professional consultants, we have to confront the issues and take actions appropriate to the situation. At best, the bad practices are contained to a single individual or department, and corrective remedies can be readily implemented. However, if such problems originate from the top, one has only one course of action, that is demur from further advisory service.


• Ownership distracted by outside activities:   I'm reminded of my sailing days when Buddy Melges skippered the winning America's Cup yacht to regain the lost trophy. Everyone was ecstatic with the victory, with the exception of Buddy. He admitted that he lost focus on running the business that nearly sank the 50 year old company. Fortunately for Scow racing community, he was able to turn the business around. Other distracted owner/clients have not been as astute to recognize their missteps, resulting in a significant loss of value.


• Looking for a "home run" to fix everything:   This goes back to the basic risk-reward theorem. Taking extremely high risk/reward actions (the home run) has a statistically lethal downside. Effective managers will channel their urge to gamble with the chips in Vegas, not the shareholder's equity.


• Quality issues with products and services:   It is easy for a manager to say that quality is one of their top priorities, but a totally different story to actually make it happen. At one company, the way quality return issues were handled spoke volumes to the underlying problems throughout their business. Customers tend to discover these problems well in advance of the business managers. In highly regulated industries, the annual audits will bring the issue to light, but often too late. In both cases, the amount of resources needed to resolve these systemic issues can devastate most businesses.


• Market share losses:   If there ever was a leading indicator for business problems, it's the loss of share in the markets that are strategically important to a business. It's ok to exit a declining market, as long as you-re not in a Titanic scenario where your long term survival depends upon it.


• Unmotivated/depressed employees:   As a consultant, I spend a good deal of my time talking with employees at all levels, asking questions, and taking the pulse of the corporate psyche. Employees a few steps away from the C-level managers can be amazingly frank and honest in their assessments. It is those people, who usually do the income producing work. And their attitudes are instantly picked up by the paying customers, who will vote with their feet.