A Tale of Two Companies

Jane is the President of ABC, Inc. 

 

On January 7th, at a sales call that was supposed to be a simple renewal, Jane learned that their largest customer was going to be cutting back their purchases by over 75%, perhaps all together.  To make matters worse, the customer notified Jane that the open invoices that  were due to be paid next week would be late, by at least 90 days.

 

Upon leaving the meeting, Jane immediately called her Controller to ask for an analysis of the impact of the loss of future revenue and the delay of short-term cash flow.  Although ABC, Inc. had been through business cycles before, this one felt different.

When her Controller called back, the news was not what Jane wanted to hear - the loss of this customer would likely lead to 30% drop in revenues and lots of excess capacity.  From the initial analysis, it was possible that the delayed payment could lead to trouble making payroll in 6 weeks.

 

Jane met with her management team and they identified the following questions that needed answers fast:

• What steps should we take in the short-term to buy us enough time to create new revenue streams?

• What costs can we cut immediately to improve our financial situation without forsaking our future?

•  How should we respond to our customer who is going to pay us late?

• What is our true cash flow position?  When will we run out of cash and what can we do about it?

Over the next few days, Jane realized that her team had never dealt with a crisis of this type.  She recognized that they were beginning to act differently - either not being able to make decision or making decisions that would be in their own personal best interest.

 

Jane concluded that running a company in a stage of financial distress is quite different from running a company in normal times.  She recognized that she needed help.

 

Calling on experts who specialized in helping businesses in financial distress, she found a willing partner who helped her prioritize her scarce resources and make the right decisions at the right time.

 

The turnaround consultant allowed her management team to focus on addressing the short-term issue while not becoming paralyzed about the long-term prospects.

 

After developing a 13-Week cash flow model and analyzing her operations, the consultant was able to help ABC, Inc. increase cash flow by decreasing the amount of cash needed for working capital, reducing fixed and variable costs, and  developing better approaches to work with vendors and customers during the challenging economic times.

 

While it wasn't easy, ABC, Inc. made it through the economic downturn and was positioned for greater profits as the markets rebounded and they could take advantage of their competitors who had not taken the proactive steps. 

Paul is the President of XYZ, Inc. 

 

On January 7th, at a sales call that was supposed to be a simple renewal, Paul learned that their largest customer was going to be cutting back their purchases by over 75%, perhaps all together.  To make matters worse, the customer notified Paul that the open invoices that  were due to be paid next week would be late, by at least 90 days.

 

This is where the story changes ...

 

Paul left the meeting feeling understandably upset, but he was pretty sure that they could make it up by focusing harder on sales.  Besides, they had lost big customers before and made it through.  And since this was a good customer, they would pay the open invoices soon enough. 

 

Upon arriving back at the office, he brought the sales team together and asked them to double their efforts over the next quarter.  His sales team told him that they were getting concerned about a few other customers, so Paul told them to  work on prospecting new customers. 

 

A month later, Paul jumped at the chance to sell to a customer who was requesting 90 day payment terms.

 

The next month, actual sales results came in 30% below forecast and Paul sat down with his controller to discuss what it could mean.  The controller told Paul that their cash position was  weakening.  The late payments from the large customer coupled with the more aggressive payment terms for the new customer meant that they might not make payroll at the end of the month.

 

Paul immediately called their late paying customer to demand payment and was told that they would be paid soon - but now Paul was starting not to believe it.

 

As Paul sat in his office on Saturday afternoon, he realized that his list of options was growing shorter by the day.

 

• Could he get a loan against his receivables?  Some yes, but the large open payment was now more than 90 days old, so no bank would lend against it.

• Could he get a revolving line of credit?  Perhaps, but he already had a personal guarantee against their current line of credit - and was he willing to risk his home?

• What about a new investor?  But, who would invest at this time?  Any how much of his company would they want?   

Then Paul got the call he dreaded.  His best sales person called to say that she was leaving the company.  She said that she was sorry, but had been offered a position at XYZ's competitor that she couldn't pass up.

 

Paul sat in his office not sure what to do.  How should he focus his team?   ... towards getting another loan with the bank?  ... or trying to recover the open receivable from the large customer?  ... or trying to sell to new clients?   ... or to raise more more equity?

Paul felt helpless.