As a turnaround and restructuring professional, I'm often asked
how you can tell when a company is headed for trouble. But the
cold reality of turnaround consulting is that by the time I'm
called in to help, the company is already in deep trouble. Management
didn't hear or didn't respond to the warning bells when they
sounded, and my job is to develop the most appropriate plan
to get the company back on its feet.
Nonetheless, in my work at restructuring and salvaging troubled
businesses, I've seen and heard a lot about what goes wrong
inside companies before they're placed on life support. I believe
my observations will be helpful to creditors and other stakeholders,
and even to the owners and management of struggling businesses,
provided that they're willing to look closely, and honestly,
at their own operation before it becomes too late.
Numbers can tell a lot about a company, so let's look first
at figures and procedures related to company's financial management.
Does it use standard accounting procedures to accurately record
information and protect against embezzlement? Does it track
cash flow on a daily, weekly and monthly basis? Does the company
have timely reporting procedures, closing the books no more
than 10 days after the end of each month? Does management track
"non-financial" indicators, such as customer satisfaction
and operations, on a monthly basis? Does the company have a
financial plan that includes forecasts of its balance sheet,
income statement and cash-flow statement? Does the company forecast
future working capital needs and begin looking for capital before
it's actually needed? The answer to all these questions should
be "yes." A "no" indicates a serious problem.
Next, look at the company's operational management, marketing
and sales. Does the company have a clearly defined mission,
goal statement and business strategy? Do employees know and
understand that mission and strategy? Does the company have
training programs for key staff? Does the company know its target
market and customers? Do employees know and understand that
mission and strategy? Does the company have training programs
for key staff? Does the company know its target market and customers?
Does the company know its competitors' strengths and weaknesses?
Is the company looking for new markets and distribution channels?
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Does the company track the number of its new customers? Does
the company track the customers it loses, and know why they
were lost? Again, if the company is running well, the answer
to all these questions should be "yes." If the answer
to any of these questions is "no," the company could
well be headed for trouble because it lacks identifiable goals,
doesn't understand its market and customers and isn't paying attention to its competition.
There are a lot of reasons why businesses fail - and many of
them are avoidable. Here are a couple, provided by the Wharton
Small Business Development Center at the University of Pennsylvania:
 Thinking they're smarter
than the competition.
Trying to beat bigger
competitors on price.
Not seeking, or listening
to, outside advisors.
Not paying attention
to how your competition is changing.
Relying too heavily
on one or two customers.
Even the best of companies sometimes hit bumps in the road.
But one way to avoid them is for the owners and management team
to make a thorough and honest assessment of their financial
and operational practices - at least on a yearly basis.
It is far better to identify potential trouble spots before
problems get out of hand than to deal with the prospect of restructuring,
bankruptcy or liquidation because the early warning signs were
ignored.
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