Fortunes have been made by those who found opportunities in the face of adversity. And many of those have been CEOs who generated reputations for bringing value to stakeholders in the most difficult circumstances.
The current economic environment may well be setting the stage for a new round of stand-out CEOs.
Speculation about a further recession dominates the business press these days not to mention geo-political issues, sanctions and even elections in 2015. Turmoil in the capital markets, concern over consumer spending and layoffs fill the headlines. Wall Street Journal economists, Goldman Sachs and the Tatum Survey of Business Conditions are all predicting recession.
Even optimists have noted that continuing talk of recession can become a self-fulfilling prophecy.
In the current environment the daily pressures of managing are exacerbated by the uncertainties evidenced daily on the national news. Companies that were in marginal condition a year ago may benefit from some degree of restructuring this year as a course-correction driven by the economy.
Many in the C-suite think the approach of a turnaround situation is obvious. For example, if a company is experiencing successive quarters of losses and is having difficulty paying its vendors on time, there is clearly need for assistance. But it is important to understand that rarely does a company’s financial health deteriorate to that extent overnight.
Many businesses in the early stages of potential difficulty may not be showing the outward earnings or cash flow signs of distress. There are almost always more subtle indicators which, either singly or together, can give management a “heads-up” that there may be some rough waters ahead. These leading indicators may vary in importance across various industries, but they generally are the same few.
Now is the time to consider the early indicators, because erosion of financial performance is like an illness – by the time the signs are obvious the disease has become harder to remedy. Performing a financial diagnostic during a volatile economic climate is a sensible preventative measure not unlike a basic health screening that enables you to take action before a situation becomes dire.
So how can the C-Suite tell if a changed approach is warranted?
Many of today’s finance executives have come of age during a strong economic period and may never have experienced recession while in a leadership role. Happily, there are lessons that any business leader can learn from the world of Turnaround Management. Executives who specialise in turnarounds see again and again situations that could have been more positive if the management team had recognized issues at an earlier stage.
Below I have detailed some leading key warning indicators:
• Declining Gross Margin and/or Operating Margins. Is there sufficient cash to sustain the company? This includes cash on hand, cash to be collected, or cash from a DIP (debtor in possession) loan.
• Inability to Meet Forecasts. It is not unusual that actual financial and operating results for a given month or quarter might vary from the original annual budget.
• Increasing Debt. Cash, whether on hand or as the result of borrowing, is most always an indicator of the health of a company. Lack of available cash coupled with the need to incur debt for capital expenditures or for an acquisition can be positive reasons to incur debt.
• High Turnover among Employees and/or Management. Even in today’s highly automated world, corporate results are still the product of the efforts of management and employees. When there is corporate health there tends to be stability in the workforce.
• Declining Market Share.Market share can be the most difficult and contested business metric that exists, especially if your industry has a substantial number of closely held private companies.
Early corrective action denotes strong leadership. Taking early action when warning signs first appear is where reputations can be built. All companies face some difficult issues during their life cycle, and CEOs and CFOs who take decisive action are recognised for their keen awareness of their business metrics and the resulting steadiness during business cycles.
An experienced outsider can help assess issues and recommend actions to make a course-correction to a more profitable future. This objective perspective will vastly enhance the speed of insight, given the officers are typically already stretched thin. Remember, when the economy changes drastically the techniques that have worked before may not be effective.
There is always a certain loneliness at the top, but this generation’s stand-out CEOs would do well to consider how the techniques of Turnaround Management could bolster results. Many pitfalls can be avoided with wise counsel, protecting or even building the reputations of the leadership team who stays ahead of the curve.