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The First Cut Is The Deepest: Taking On The Most Painful Parts Of A Turnaround

Turning around a business that has bottomed out is gory work: There’s going to be lots of losses to cut–including people. Here’s how to stop the bleeding.

The First Cut Is The Deepest: Taking On The Most Painful Parts Of A Turnaround

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There are many similarities between a company in trouble and an individual who has been in a horrible accident. The accident victim may have several broken bones, which will require setting and perhaps even surgery, but the first job of the emergency room doctor is to ensure that the victim lives long enough to have those bones set. After all, if his bleeding goes unchecked and he bleeds to death, the broken bones are rather immaterial. So what do we do first for the sick company? We stop the bleeding.

We know that accident victims hemorrhage blood, and the emergency room doc must keep that blood from leaking out. Similarly, we know that sick companies hemorrhage cash, and we must stop the cash from leaking out or the company will cease to exist.

As you prepare to take your company from troubled to triumphant, you must first stabilize your company before making changes. So you as the emergency room doctor will have to make some tough decisions–decisions that you may have not been willing to make before.

To stabilize your company, you must personally take control of your cash and find quick ways to improve your cash flow. The three quickest ways to do that are to reduce your expenses, improve your collections, and negotiate with your vendors.

Reduce Your Expenses

You must take personal control of your bank account. Nobody should spend a dollar without your approval. Begin expense reductions by looking carefully at your payroll. It is not unusual in turnaround situations for the turnaround manager to eliminate up to 20 percent of the jobs within the company. Is that tough? Of course it is, and the people who remain have to take up the slack, but it is far more preferable than closing the doors. You, as the turnaround manager, will likely find people who can be terminated or furloughed. As you make these decisions, your guiding question should be whether the company can continue to function without the position in question. Who will perform these duties? As you go through the process of eliminating jobs, it is vital that you let the remaining employees know that these changes are necessary if the company is going to survive. Believe me, they won’t be surprised. They’ll most likely be relieved by the fact that you are actually taking some action.

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These actions are often particularly difficult for family-owned businesses that have layers of family on the payroll. You may have to slash family members’ jobs just like you would any other job. Remember, the key is to buy yourself some time so you can fix your company.

Don’t assume that all of the expense savings comes from payroll. Examine every expense. I can promise you that you will find costs that are not necessary to your company’s survival and, in fact, are detrimental at this time. Pay particular attention to various memberships and subscriptions that you have set up to be automatically deducted from your bank account or automatically charged to your credit card. Many of these costs renew automatically and some can be easily eliminated. Remember that every dollar you save increases your chances of survival.

One change I often see owners make is to reduce or completely eliminate their salaries. Do not do this! You, as an owner, are taking all of the risks, and you are entitled to fair compensation. In fact, many times I will suggest to owners in a turnaround situation to give themselves a raise if they have been shortchanging themselves.

Improve Your Collections

Chances are you have a fair amount of cash tied up in accounts receivable. You must convert those older receivables to cash. You can implement effective collection procedures once you have created some breathing room for your company. Again, you are going to have to make some tough decisions. Take an aging of your receivables and identify the customers who are seriously delinquent.

You, as the owner, must call them and demand your money. Be relentless. Call after hours if necessary. Call the owners of your customers at home if you have to. Just keep the pressure on your slow-paying customers. Customers who refuse to pay or refuse to create some type of payment arrangement will have to be put on credit hold and sold only on a COD basis. Could you lose some customers during this process? Sure, but what good is a non-paying customer? While you are in triage mode, you have to be ruthless.

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Being ruthless can work. Pick your battles and remember that your goal is to collect your money and buy time to fix your company. You are in a war, and your daily battle is to collect the cash that you need to keep your business running.

Negotiate Payments with Vendors

The next thing that you have to do is to begin negotiating payments with your vendors. Come on, they already know you are struggling because you are getting lots of collection calls from them. Of course, when they call you, you find ways to pay them, because that is what responsible companies do. They pay their bills. But the truth is that responsible and solvent companies pay their bills in a timely manner, and solvent just does not describe you–yet.

So what are you going to do? You are going to do the same things that companies like Amazon have done. You are going to talk to your suppliers, explain the situation to them, and work out a plan to delay your payments. You might ask, how is this going to help me long term? Well, let’s assume that your monthly non-payroll costs are $350,000. If you work out a thirty-day delay in payments, you have created for yourself a thirty-day, interest-free permanent loan. Amazon virtually doubled its cash flow by utilizing that strategy. And the delay doesn’t have to be a lot of days, but you do need to negotiate it up front. Remember, you must make vendors understand there is no alternative; you need this concession to survive and stabilize. Why would they agree to it? It’s a lot better for them than taking pennies on the dollar in bankruptcy court.

Now you are starting to put together a battle plan. You have reduced your payroll and other costs. You have accelerated your collections. You have reached an agreement with your suppliers to delay payments. All of these actions will help buy you the time you need.

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From the Small Business Turnaround Guide by Sandy Steinman (Morgan James, $17.95.)

[Image: Flickr user Matt Katzenberger]