CHAPTER

18The Entrepreneur and

the Troubled Company

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External Causes for Failure

Recession Interest rate changes Changes in government policy Inflation The entry of new competition Industry/product obsolescence

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Internal Causes for Failure

Inattention to strategic issues Misunderstood market niche Mismanaged relationships with suppliers

and customers Diversification into an unrelated business area Mousetrap myopia The big project Lack of contingency planning

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Internal Causes for Failure

General management problems Lack of management skills, experience,

and know-how Weak finance function Turnover in key management personnel Big-company influence in accounting

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Internal Causes for Failure

Poor planning, financial/accounting systems, practices, and controls Poor pricing, overextension of credit, and

excessive leverage Lack of cash budgets/projections Poor management reporting Lack of standard costing Poorly understood cost behavior

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Net-Liquid-Balance-to-TotalAssets Ratio

Net-Liquid-Balance-to-Total Assets Ratio = Net-Liquid-Balance/Total Assets

WHERE

Net-Liquid-Balance =(Cash + Marketable securities) - (Notes Payable + Contractual obligations)

Source: Joel Shulman, “Primary Rule for detecting Bankruptcy: Watch the Cash,” Financial Analyst Journal, September 1988.

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Nonquantitative Signals of Trouble

Inability to produce financial statements on time

Changes in behavior of the lead entrepreneur

Change in management or advisors, such as directors, accountants, or other professional advisors

Accountant’s opinion that is qualified and not certified

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Nonquantitative Signals of Trouble

New competition Launching of a “big project” Lower research and development

expenditures Special write-offs of assets and/or addition

of “new” liabilities Reduction of credit line

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Telltale Trends of Organizations in Trouble

Ignore outside advice People (including and usual, most

especially, the entrepreneur) have stopped making decisions and also have stopped answering the phone

Nobody in authority has talked to the employees

Rumors are flying

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Telltale Trends of Organizations in Trouble

Inventory is out of balance Accounts receivable aging is increasing Customers are becoming afraid of new

commitments A general malaise has settled in while a

still high-stressed environment exists (an unusual combination)

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Turning Around a Troubled Company

Diagnosis of the problem Strategic analysis Management analysis Cash flow analysis

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Cash Flow Analysis

Steps in identifying and quantifying the profitable core of the business Determine available cash Determine where money is going Calculate percent-of-sales ratios for

different areas of a business and then analyze trends in costs

Reconstruct the business Determine differences

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Potential Cuts/Improvements

Most common areas for potential cuts/improvements Working capital management Payroll Overcapacity and underutilized assets

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Longer-Term Remedial Actions

Systems and procedures Asset plays Creative solutions