Lessons from Troubled Companies - 5 and 6

LESSON 5 - ACCOUNTS RECEIVABLE

The Business Cycle is not complete until you collect the money. Sales and Gross Profit can be extraordinary, but if you do not collect the money you can't pay the bills or make payroll.

Accounts Receivable management requires not only that your company has discipline, but also that your customers pay on time. The temptation to be flexible with customers is greatest when sales are stagnant and competition is high.

Many management teams of troubled companies are pursuing revenue growth so aggressively that they fail to enforce payment terms on certain customers, and they may even take on customers who are trying to avoid tough credit policies with their competitors. Guess which customers are most likely to default on their credit.

Many companies borrow against or factor their receivables to shorten their A/R turnover (sale to cash days). The importance of prompt collections does not go away. Generally, businesses can only borrow 85% of their receivables that are not more than 30 to 60 days past due. The business then incurs the interest charges and is still burdened with the delinquent dollars.

Successful companies have a strict credit policy and they begin from Day One with firm and consistent application of this credit policy. The truth is that your customers will have more respect for your company if you maintain your discipline.

Your A/R discipline is a reflection of your company's ability to deliver and perform on difficult tasks and in tricky situations. Failure to follow this discipline registers with many customers and competitors as a sign of weakness. Short-term success may be followed by failure in the long term.

LESSON 6 - DEBT

In today's tough business environment, too many businesses are drowning in debt. Companies may have industry leading profit margins, but with leveling or declining revenue growth these companies are struggling to cover their interest costs and debt service requirements. As discussed earlier, many companies, especially start-ups and troubled companies, must determine how much debt is the cap. If you're burning cash too fast and you have to float more debt or raise more capital, then start back at lesson number one and read the lessons over again. There are underlying issues that need to be cured.

All successful businesses have a fundamentally sound, effective, and efficient finance function. Whether a company is an early stage company or a mature company in a consolidating industry, the basic financial scorecards must be kept and studied. Troubled companies' management teams are usually in denial when it comes to the financial trends and scorecards.

If all of this sound likes the basics of business, it's because it is the basics. Unfortunately, there are too many CEOs, CFOs, and Management Teams that do not maintain the intense and persistent focus that is necessary to build and sustain a successful business.

Bankers, private equity professionals, successful CEOs and CFOs are fundamentalists. They guard cash as if the business' life depends on it. They develop and study the business plan and then challenge the assumptions that the Company's success hinges on. They hold the management team accountable for the development and execution of sound cash, operational, and CapEx budgets.

Before they invest or loan funds, they are confident in the quality and commitment of the Management Team, feel secure that the business has adequate HR and technology resources, efficient systems and processes, and they are convinced that there is a viable core business purpose within the industry or marketplace. Every business owner would be well served to employ the same discipline and best business practices on a day to day basis.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.

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